In March, the United States Consumer Price Index (CPI) excluding food and energy recorded a year-on-year increase of 2.8%, falling short of the forecasted 3%.
The CPI data reflects the inflationary trends in the economy, with the current rate indicating slower growth.
Inflationary Pressure Easing
This lower-than-anticipated core CPI figure reinforces the notion that inflationary pressure may be easing, albeit gradually. From a pricing standpoint, this undercut deflates earlier expectations about the pace and timing of monetary tightening. What we saw in the market following this release—immediate, sharp adjustments in rate futures and bond yields—was driven less by the numbers themselves, and more by what they implied for policy expectations.
The Federal Reserve has consistently signalled its data-dependence, and with this softer print, it gains cover to maintain a less aggressive stance on rate hikes. In practical terms, this means implied volatility on rates-linked products has dropped as fewer participants expect urgent interventions. Swaps markets reflected this shift almost instantly, with a slight flattening of curves and forward rate agreements pricing in reduced odds of an increase at the next meeting.
Powell’s comments in recent sessions support the dovish shift, where he emphasised patience and indicated a need to let prior hikes filter through the system. By aligning communication with the data, the central bank allows the market to recalibrate in more controlled increments, reducing the risk of sharp re-pricing events.
As traders, we watch not just the year-on-year figures, but also the monthly progression for clues on underlying momentum. March’s data brought that key metric down to 0.2% month-on-month, hinting at a slower pace of price increases. That’s where the attention should remain. It gives us a firmer handle on short-term inflation dynamics without being distorted by last year’s base effects.
Understanding Trading Implications
Derivatives tied to inflation expectations—such as breakevens and TIPS spreads—have aligned more closely with this slower path. We noticed that five-year breakevens retreated further, signalling that the market believes inflation is not only peaking but possibly stabilising at around target levels ahead of schedule. That has direct implications for positioning, especially for those exposed to macro-themed structured products or options with convex payoffs tied to real yields.
Meanwhile, institutions adjusting their hedging strategies might scale back some of their protection against price shocks. Volumes in short-dated puts on inflation proxies dropped notably last week, which points to reduced urgency in guarding against extreme upside risks.
However, the move in nominal rates continues to impact dollar funding spreads, which tightens liquidity for leveraged participants. For those active in spread trades or calendar spreads, there is new value being created—and removed—fairly quickly right now. The windows are narrower, but the dislocation is still present. Timing has become more important than direction.
Looking ahead, it seems unlikely that the Fed will resume aggressive action unless subsequent prints show a reversal in this trend. April and May data sets, particularly personal consumption expenditures and forward-looking PMIs, will weigh heavily on sentiment. We’re preparing for more rangebound activity in the near term, unless any geopolitical developments unexpectedly roil the steady rhythm.
For derivative portfolios, especially those linked to volatility, skew, or rate slopes, these recent developments require nimble, reactive strategies. Gone are the days of letting positions run indefinitely. Now it’s about trimming with precision, building around event dates, and watching positioning data for any signs of crowding. If pricing becomes too directional, we’re liable to see sharp corrections when expectations get adjusted.
The opportunity lies not in outsized directional bets, but in relative moves and timing entry correctly around data windows. The Fed has given the market room to breathe—for now.
