Bonds on Thursday got battered by another jump in inflation, which sped up to 7.5% in January to mark a fresh four-decade record, or the highest pace seen since the early 1980s. That led the benchmark 10-year Treasury yield to cross the 2% level, ending the session 6 bps higher, while the two-year yield jumped the most since 2009. While yields are still low by historical standards, the speed of the recent Treasury movement is highlighting a meaningful shift for borrowing costs across the economy, or an input that investors use to value stocks and other assets. It was only a month ago that the 10-year yield was hovering around 1.5%.

Bigger picture: For those doubting recent signals from the Fed, it's pretty clear that the hawkish monetary era has arrived. St. Louis Fed Chair James Bullard, a voter on the FOMC this year, said he now favors a half-point interest rate hike in March, the first increase of that magnitude since 2000. While he is on the more hawkish side of the central bank, other policymakers have also expressed urgency about rate increases and reducing the size of the Fed's balance sheet, which could put further upward pressure on yields.

In fact, Fed-funds futures now point to a more than 70% chance the Fed will raise short-term rates from their current level (near zero) to at least 1.75% by the end of the year, according to data from CME Group. That was up from a 22% probability on Wednesday and 1% a month ago. Economists also keep lifting the pace of their forecasts, with Goldman Sachs (joining Bank of America) in raising rate hike expectations to seven times for 2022, up from five projected earlier.

Outlook: Equities, especially tech and growth stocks, came under pressure after the explosive inflation data, and many are warning that the recent volatility could rise across all asset classes in case of a policy mistake (acting too late, too strong, or not strong enough). However, should the rate hikes successfully put a lid on price pressures this year, early losses could be followed by strong gains for equities. In terms of the 10-year Treasury yield, the rate is likely to settle into a range between 2% and 2.5%, according to strategists at Morningstar and Neuberger Berman.

Accurate proxy?

With the rate of inflation grabbing so many headlines since the pandemic, it's worth taking a deeper look into how the Consumer Price Index is aggregated. Primarily, the index provides a gauge for how much people are paying for goods and services. These can include transportation, food, rent, clothing, haircuts and medical care (80,000 items are included in the report).

To start: The CPI reflects the spending patterns of two population groups: Urban wage earners and clerical workers (CPI-W), as well as all urban consumers (CPI-U). The all urban consumer group represents around 93% of the total U.S. population, and is based on the expenditures of almost all residents of urban or metropolitan areas, including professionals, the self-employed, the unemployed, the poor and retired people. The gauge, though, doesn't include the spending of those people living in rural non-metropolitan areas, farming families, people in the military, and those in institutions, such as prisons and mental hospitals.

Each month, data is collected in 75 urban areas across the country from about 6,000 housing units and 22,000 retail locations (such as department stores, supermarkets and hospitals). Taxes directly associated with the purchases are also included in the data. Price changes for the various items in each location are aggregated using weights, which represent their importance in the spending of the appropriate population group.

Getting critical: The statistical methodology used to calculate the CPI has undergone many revisions over the years, such as measuring the cost of goods vs. the cost of living. With January's CPI report, the weightings of the indexes have changed. They're now based on consumer spending patterns across 2019 and 2020, replacing the weights based on spending in the two previous years, and since consumer spending patterns shifted significantly towards goods and away from services in 2020 due to the pandemic, that will affect this year's CPI readings.

'Freedom Convoy'

A third border crossing between the U.S.-Canada was blockaded by truckers on Thursday, building on the "Freedom Convoy" movement that has been protesting vaccine mandates and other coronavirus restrictions. The Emerson crossing between Manitoba and North Dakota was shut down in both directions, in addition to the Coutts crossing linking the province of Alberta with Montana, as well as the critical Ambassador Bridge connecting Windsor, Ontario, to Detroit.

Crisis deepens: Homeland Security Secretary Alejandro Mayorkas and Transportation Secretary Pete Buttigieg have phoned their Canadian counterparts about the situation, urging them to use federal powers to resolve the standoff. Windsor Mayor Drew Dilkens also made a plea for a court injunction, citing economic damage, while Canadian officials successfully asked a court to freeze millions of dollars in donations through crowd-funding site GiveSendGo after cutting off a similar effort on GoFundMe. Meanwhile, the Detroit International Bridge Company, which owns the Ambassador Bridge, pushed Canada to end the protest by rescinding the vaccine mandate or removing the vehicles so trade can resume.

The demonstrations have already disrupted production lines and even shut down the plants of nearby automakers like Ford (NYSE:F), GM (NYSE:GM), Stellantis (NYSE:STLA), Toyota (NYSE:TM) and Honda (NYSE:HMC). "We hope this situation is resolved quickly because it could have widespread impact on all automakers in the U.S. and Canada," a Ford spokesman declared. Putting it in perspective, the Ambassador Bridge is the busiest international land-border crossing in North America, responsible for 30% of about $600B in annual two-way trade between the U.S. and Canada.

Things could get worse: In a bulletin to local and state law enforcement agencies, the Department of Homeland Security said it has received reports that truckers are planning to "potentially block roads in major metropolitan cities." A convoy could begin in Southern California as early as this weekend, possibly disrupting traffic around the Super Bowl, and reach Washington in March in time for the State of the Union address. North of the border, demonstrations are going into their third week in Ottawa, where truckers have clogged up traffic and paralyzed the Canadian capital.

10 inflationary reactions

Market turmoil: "I expect that we'll see a return of the volatility that was prevalent for most of the month of January in the wake of this [CPI] report," said Brian Price, head of investment management at Commonwealth Financial Network. "Investors may want to buckle up as it could be a rough ride for risk assets until inflationary data starts to abate, and I expect that it will, as we move through the year."

It's everywhere: "What started as pandemic-specific inflation has now broadened out across many, many categories both on the goods side of the economy and on the services side," explained Kathy Bostjancic, chief U.S. financial economist at Oxford Economics. "It reflects supply constraints both in the goods market and the labor market but it also is a function of still strong demand, particularly from U.S. consumers."

Consumer sentiment: "This survey is really showing that there's a lot of financial anxiety that's caused by inflation, market volatility and just that uncertainty coming out of the pandemic and the impact that it has had on everyone in their everyday lives," added Celeste Revelli, director of financial planning at eMoney.

Hard on the wallet: "A lot of people are hurting because of high inflation. The average U.S. household is spending an additional $276 a month - that's a big burden," estimated Ryan Sweet, a senior economist at Moody’s Analytics. "It really hammers home the point of 'what is the cost of inflation?'"

Wage-price spiral: "If consumers and workers start believing that inflation is not going to be transitory they're going to start demanding higher wages and higher inflation becomes embedded in the system," declared John Briggs, head of strategy for Americas at NatWest Markets.

Let it play out: "I certainly can relate to how people are feeling. I am somewhat optimistic though," announced Dr. Michael Greiner, economist at Oakland University. "While we're seeing a jump the amount of the jump is actually decreasing. Over the long-term this is really going to be a short term problem."

The White House: "According to Nobel laureates, 14 of them that contacted me, and a number of corporate leaders, it ought to be able to start to taper off as we go through this year," President Biden said in an interview. "In the meantime, I'm going to do everything in my power to deal with the big points that are impacting most people in their homes."

Supply chain: "While we're hopeful prices will begin to decline in the coming months, prices at grocery stores and restaurants may take longer to adjust downward," noted Jonathan Silver, CEO of Affinity Solutions, which tracks consumer purchasing habits. "We're unlikely to see a full correction in the supply chain until later this year or even 2023."

Policy error? "The first error occurred on Nov. 30, when the Fed finally retired 'transitory,'" pointed out Mohamed El-Erian, chief economic adviser at Allianz. "Now, the policy error would be to slam on the brakes because they didn't take their foot off the accelerator early enough."

Forex watch: "If the Fed is to step hard on the monetary brakes, we would certainly favor the dollar against the low yielders backed by central bankers who have firmly placed themselves in the dovish camp," said Chris Turner, global head of markets at ING.

Today's Markets

In Asia, Japan closed. Hong Kong -0.1%. China -0.7%. India -1.3%.
In Europe, at midday, London -0.8%. Paris -1.1%. Frankfurt -0.4%.
Futures at 6:20, Dow -0.4%. S&P -0.5%. Nasdaq -0.6%. Crude +0.7% $90.47. Gold -0.6% at $1827.20. Bitcoin -2.8% to $43,528.
Ten-year Treasury Yield -2 bps to 2.00%

Today's Economic Calendar

10:00 Consumer Sentiment
1:00 PM Baker-Hughes Rig Count

Companies reporting earnings today »

What else is happening...

Twitter (NYSE:TWTR) loses steam as inflation weighs on investors' minds.

Affirm (NASDAQ:AFRM) tanks after Q2 loss; guidance sees more losses ahead.

Zillow (ZG) surges as Q4 Offers revenue surges over 1,000% Y/Y.

CDC plans COVID vaccine rollout for younger kids by Feb. 21.

Strong pricing leads to Coca-Cola (KO) earnings topper.

PepsiCo (PEP) rides strong organic sales to offset cost pressures.

Black Rifle Coffee (NYSE:BRCC) soars in first day following de-SPAC.

Kellogg (NYSE:K) powers through inflation, bottlenecks and a labor strike.

Unilever (NYSE:UL) warns surging costs will weigh on profit margins.

Official OPEC stats for January are out and are worse than expected.

Astra Space (ASTR) plunges to Earth after NASA mission failure.