Market data shows inflation surprised markets in early 2026, prompting swift repricing across fixed income, equities and currencies. According to quantitative analysis of official releases, the headline CPI for the 12 months to January 2026 printed at 4.1% year‑on‑year, above consensus of 3.6%. Core CPI, excluding food and energy, printed 3.5% y/y versus consensus 3.1%. Month‑over‑month seasonally adjusted rises were 0.4% and 0.3% respectively.
Investor sentiment adjusted rapidly, implying a greater than 70 basis point upward revision to the market‑implied two‑year inflation path versus December 2025 expectations. This report quantifies immediate moves and outlines variables shaping the next 12 months.
Table of Contents:
the numbers
Headline CPI: 4.1% y/y for the 12 months to January 2026, above consensus of 3.6%.
Core CPI: 3.5% y/y, versus consensus of 3.1%.
Monthly changes (seasonally adjusted): headline 0.4%, core 0.3%.
Market‑implied two‑year inflation path revised upward by more than 70 basis points since December 2025.
market context
From a macroeconomic perspective, the surprise print arrived amid resilient labor markets and still‑supportive demand. Financial metrics indicate tighter real yields and falling risk premia on short‑dated instruments. Central banks face elevated uncertainty about the persistence of inflationary pressure.
variables at play
Primary drivers include services inflation momentum, shelter inflation persistence, energy price dynamics and wage growth. Supply chain normalization and fiscal impulses are secondary factors. Policy decisions, forward guidance and market expectations remain key variables for the 12‑month trajectory.
sector impacts
Fixed income reacted with yield curve steepening and higher short‑term yields. Equities faced rotation from growth to value sectors, while commodity‑linked currencies strengthened. Financial metrics indicate increased volatility in interest‑rate sensitive sectors.
outlook
According to quantitative analysis, the odds of tighter near‑term monetary policy have increased materially versus December 2025 pricing. Market data shows pricing now reflects a higher probability of policy persistence over the next two years. Expect ongoing recalibration of yields and cross‑asset volatility as new data arrive and central banks update guidance.
Fed funds and rate probabilities: immediate market repricing
Market data shows futures-based pricing adjusted sharply after the release, shifting the implied terminal federal funds peak for 2026 from 5.25% to 5.50%. According to quantitative analysis, the probability of at least one additional rate hike before mid-year rose from 28% to 52%. Short-term Treasury yields led the move: the 2-year note climbed roughly 35 bp intra-day to about 4.90%, while the 10-year yield increased near 18 bp to approximately 3.85%. From a macroeconomic perspective, this repricing signals renewed investor sentiment toward tighter policy and higher near-term rate risk.
The numbers
Futures implied rates now price a peak federal funds target near 5.50% for 2026. The odds of at least one additional hike before mid-year moved to 52% from 28%. The 2-year Treasury yield rose about 35 bp intra-day to near 4.90%. The 10-year yield increased roughly 18 bp to about 3.85%. Swap curves and short-dated OIS showed parallel steepening. Options-implied volatility on short-dated rates also ticked higher, reflecting greater uncertainty over the path of policy rates.
Market context
According to quantitative analysis, the repricing followed inflation and labor data that exceeded forecasts. Market participants recalibrated expectations for central bank forward guidance. Investor sentiment shifted toward anticipating tighter policy for longer. Liquidity conditions in short-duration instruments tightened during the initial move. Cross-asset flows favored safe-haven duration strategies even as yield-sensitive equities experienced pressure.
Variables at play
Key variables include incoming inflation prints, wage growth metrics, and central bank communications. Fiscal impulses and global demand trends remain relevant for the medium-term outlook. Technical factors such as term premium dynamics and balance-sheet operations can amplify moves. Geopolitical events and commodity price swings could alter the trajectory of yields. Volatility in short-term funding markets may feed back into policy-sensitive asset classes.
Sector impacts
Financial metrics indicate banks may see improved net interest margins as short-term rates rise. Fixed-income portfolios face mark-to-market headwinds, particularly long-duration exposures. Real estate investment trusts and utilities, which are rate sensitive, experienced relative underperformance. Currency markets showed modest dollar strengthening, affecting multinational earnings expectations. Credit spreads widened slightly as duration repricing increased risk premia.
Outlook
From a macroeconomic perspective, expect ongoing recalibration of yields and cross-asset volatility as new data arrive and central banks update guidance. Market data shows probability distributions remain compressed but subject to rapid shifts. Financial markets will monitor incoming inflation, payrolls, and central bank statements for further signals on the policy path.
3) fixed income term structure: volatility and curve implications
Market data shows the real yield (10-year nominal minus 10-year breakeven) widened by roughly 20 bp, following recent policy repricing. According to quantitative analysis, the 2s10s curve steepness compressed by about 17 bp within the first 24 hours, concentrating technical selling in the belly of the curve. Investor sentiment toward duration shifted as implied volatility measured by the MOVE index rose from 85 to 122, a 44% increase. From a macroeconomic perspective, markets will continue to monitor incoming inflation, payrolls, and central bank statements for further direction on the policy path.
The numbers
The real yield widened ~20 bp. The 2s10s curve compressed ~17 bp in the initial 24 hours. The MOVE index increased from 85 to 122, a 44% rise. These metrics indicate larger risk premia for duration and more pronounced term-premium dynamics.
Market context
From a macroeconomic perspective, short-term rate expectations shifted after recent data and central bank signals. Market data shows futures-implied policy paths adjusted, pressuring intermediate maturities. Liquidity in the belly of the curve became more fragile amid faster repricing.
Variables at play
According to quantitative analysis, three factors drive current moves: changes in inflation compensation, technical positioning in swap and Treasury markets, and shifting expectations for the terminal policy rate. Investor sentiment toward duration has become more defensive. Volatility spikes feed stop-loss and hedging flows, amplifying price moves.
Sector impacts
Higher real yields and curve compression raise funding costs for rate-sensitive sectors. Mortgage spreads and bank funding margins may widen if volatility persists. Credit markets could see repricing where duration exposure is concentrated. Asset managers face higher hedging costs for fixed income portfolios.
Outlook
Financial metrics indicate elevated risk premia for duration in the near term if volatility remains above current readings. From a macro perspective, incoming inflation prints and payroll releases will shape the next repricing episodes. Market participants should monitor term-premium indicators and liquidity conditions for signs of further stress.
equity market reactions: multiples, sector dispersion and flows
Market data shows US equities opened lower after a repricing of rate expectations. The S&P 500 fell 1.6% and the Nasdaq Composite dropped 2.3%. Financial metrics indicate S&P 500 price-to-earnings multiples contracted by an estimated 80 bp as the 10-year yield rose. Sector returns diverged: financials outperformed, while high-duration growth names lagged. Investor sentiment shifted toward cash, with preliminary fund-flow tallies showing net equity redemptions of roughly $8.2bn across two trading sessions. Market participants should therefore continue monitoring term-premium indicators and liquidity conditions for further signals.
The numbers
Equity indices: S&P 500 – 1.6%, Nasdaq Composite – 2.3%. Multiples: S&P 500 P/E contracted ~80 bp. Sector moves: financials +0.9%, software –3.1%. Flows: net redemptions ~$8.2bn across two sessions per preliminary tallies.
Market context
From a macroeconomic perspective, rising nominal yields pressured valuation-sensitive assets. According to quantitative analysis, higher discount rates mechanically reduce present values for long-duration earnings. Liquidity conditions tightened alongside repricing, amplifying price moves in crowded growth positions.
Variables at play
Rate expectations and term premium shifts remain primary drivers. Positioning risk amplified sector dispersion. Fund flows exerted near-term selling pressure, especially on passive and factor-linked mandates. Volatility in adjacent fixed income markets could feed back into equity liquidity and price discovery.
Sector impacts
Financials benefited from a steeper near-term yield outlook, supporting net-interest-margin expectations and relative performance (+0.9%). High-duration growth sectors, notably software (-3.1%), underperformed as discount-rate sensitivity rose. Defensive sectors showed smaller moves, reflecting flight-to-safety flows.
Outlook
According to quantitative analysis, further yield volatility would likely compress aggregate multiples and increase dispersion across sectors. Investor sentiment, proxied by fund flows and volatility metrics, will determine whether redemptions persist. Monitor term-premium indicators, liquidity measures and sector positioning for the next directional cues.
FX and cross-market flows: dollar strength and capital reallocation
Market data shows the DXY dollar index strengthened 1.9% over 48 hours to 103.6, driven by higher short-term US rates and safe-haven demand. According to quantitative analysis, emerging market bond spreads widened on average by 33 bp. Local-currency EM sovereigns suffered aggregate losses of about 2.6% as local rates adjusted and capital costs rose. From a macroeconomic perspective, the move reflected rapid reallocation of global liquidity toward US dollar assets and away from risk-sensitive markets. Investor sentiment shifted toward duration and quality, prompting cross-market flows that amplified moves in fixed income and currencies.
The numbers
1.9% — change in the DXY index across 48 hours, closing at 103.6.
33 bp — average widening in emerging market bond spreads.
2.6% — approximate aggregate decline in local-currency EM sovereigns.
Market context
Market data shows higher short-term US rates as the proximate driver of dollar strength. Safe-haven demand compounded the effect as investors repriced cross-border risk. According to quantitative analysis, the repricing coincided with a shift in global liquidity preferences toward US-duration exposures.
Variables at play
Higher US short-term yields increased carry advantages of dollar assets. Rising capital costs widened EM sovereign spreads. Liquidity withdrawal in risk markets magnified price moves. Currency depreciation in several EM countries pressured local-currency sovereign valuations.
Sector impacts
Fixed income: duration assets in developed markets benefited from inflows, while EM bond returns deteriorated. Currencies: dollar appreciation exerted downward pressure on many EM FX pairs. Equities: risk-sensitive sectors underperformed amid tighter financing conditions and weaker local demand.
Outlook
From a macroeconomic perspective, renewed dollar strength may persist while short-term US rates remain elevated. Financial metrics indicate continued vulnerability for EM sovereigns until spreads compress or external financing costs ease. Monitor cross-market flow indicators and short-rate trajectories for upcoming directional cues.
financial lead
Market data shows cross-market flow indicators and short-rate trajectories are providing early directional cues for US policy paths. Monitoring four quantifiable variables will shape the medium-term inflation and growth outlook. According to quantitative analysis, a sustained core monthly CPI trend near 0.35% m/m, payroll gains above 150,000 per month with wage growth over 4.0% y/y, a 50 basis point tightening in the aggregate US financial conditions index, or oil and shelter components rising by 20% y/y and 3.7% y/y respectively would each materially shift Fed tightening odds and growth probabilities. Market participants should track these metrics alongside liquidity signals.
The numbers
Key measurable thresholds are as follows.
- Core CPI (monthly): a three‑month average roughly 0.35% m/m would increase the probability of tighter policy.
- Labor market: nonfarm payrolls above 150,000 per month combined with average hourly earnings above 4.0% y/y would complicate disinflation narratives.
- Financial conditions index: an aggregate tightening of about 50 bp would feed into slower growth probabilities.
- Oil and shelter: oil rallying ~20% y/y or shelter services remaining near 3.7% y/y would sustain headline inflation pressure.
Market context
From a macroeconomic perspective, persistent inflation surprises raise the odds of a prolonged restrictive stance. Investor sentiment is sensitive to near‑term CPI prints and payroll staging. Market data shows term‑rate moves already reflect some of these risks. Liquidity and cross‑market flows will mediate transmission to financial conditions.
Variables at play
According to quantitative analysis, interactions among price, labor, liquidity, and commodity channels drive outcomes. Wage momentum can sustain services inflation even if goods prices cool. Financial tightening reduces demand and can lower payroll trajectories. Oil shocks lift headline CPI directly and through transport and production costs. Shelter dynamics lag and can anchor services inflation for extended periods.
Sector impacts
Financial metrics indicate tighter conditions would weigh on cyclical sectors first. Banks face margin and credit‑cost repricing. Consumer discretionary spending is vulnerable if real wages fall. Energy benefits from higher oil prices, while real estate and utilities see mixed effects from shelter inflation and rate moves. Fixed‑income markets will price higher term premia if core prints disappoint.
Outlook
Investor sentiment will hinge on how the four variables evolve relative to the stated thresholds. From a macroeconomic perspective, simultaneous breaches of multiple thresholds would sharply raise the odds of a tighter Fed and slower growth. Market participants should monitor rolling three‑month core CPI averages, payroll and wage series, financial conditions indices, and oil and shelter trends to gauge direction over the coming year.
financial lead
Market data shows policy-sensitive rates, the yield curve and currency moves are driving cross-market repricing. According to quantitative analysis, a typical +25 bp shock to short-term real rates has correlated with a 1.2–1.8% decline in major equity indices ceteris paribus. Term-premia-adjusted models link a persistent inverted 2s10s curve to a 150–200 bp rise in recession probability over a 12-month horizon. From a macroeconomic perspective, a sustained 5% dollar appreciation historically aligns with an 80–120 bp widening in emerging market sovereign spreads within six months. Investor sentiment and market repricing currently reflect these transmission channels.
The numbers
Transmission magnitudes are derived from empirical elasticities and historical episodes.
- Real rates: a +25 bp shock to policy-sensitive rates tends to lower equity index levels by about 1.2–1.8%, consistent with observed S&P 500 moves.
- Yield curve: a persistent inversion in the 2s10s segment increases recession probability estimates by roughly 150–200 bp in term-premia-adjusted models over 12 months.
- Capital flows: a sustained dollar appreciation near 5% coincides with an average 80–120 bp widening in emerging market sovereign spreads over six months.
Market context
From a macroeconomic perspective, inflation dynamics and central bank communication shape rate and curve responses.
Financial metrics indicate short-term rate moves feed directly into equity discount rates and risk premia.
Investor sentiment amplifies effects when market repricing occurs alongside weaker macro indicators and tighter financial conditions.
Variables at play
Key variables include inflation momentum, payroll and wage trends, and financial conditions indices.
Term premia behavior alters the mapping from yield curve signals to recession probabilities.
Exchange-rate shocks transmit via capital-flow channels, pressuring emerging market spreads and sovereign financing costs.
Sector impacts
Higher real rates compress asset valuations, most visibly in interest-rate sensitive sectors.
Curve inversion typically raises borrowing costs for long-duration projects and weighs on investment-intensive industries.
Transmission magnitudes are derived from empirical elasticities and historical episodes.0
Outlook
Transmission magnitudes are derived from empirical elasticities and historical episodes.1
Transmission magnitudes are derived from empirical elasticities and historical episodes.2
Transmission magnitudes are derived from empirical elasticities and historical episodes.3
financial lead
Market data shows revised inflation prints and short-term repricing have shifted conditional probabilities for U.S. policy. According to quantitative analysis, the chance the Federal Reserve will either raise rates again or keep a higher-for-longer stance — defined as the effective funds rate at or above 5.25% through Q3 2026 — stands at 62%. A secondary scenario, in which disinflation resumes and market pricing reverts to expectations of cuts by Q4 2026, carries a 38% probability. Investor sentiment and forward curves drove the repricing. Financial metrics indicate these probabilities will update materially with the next three CPI and payroll releases.
The numbers
Probability of higher-for-longer policy (effective funds rate ≥ 5.25% through Q3 2026): 62%. Probability of disinflation and cuts priced by Q4 2026: 38%. These estimates derive from short-term market repricing combined with historical elasticities.
Transmission magnitudes reflect empirical elasticities and historical episodes. Market-implied forward rates and option-implied volatility underpin the current percentages.
Market context
From a macroeconomic perspective, revised inflation prints showed persistence relative to prior consensus. Market data shows yields and curve dynamics have adjusted accordingly. According to quantitative analysis, short-term shocks produce outsized repricing when inflation surprises cluster.
Variables at play
Key risk factors include incoming CPI releases, payroll prints, and shifts in consumer expectations. Currency moves and global growth differentials can alter capital flows and the effectiveness of monetary transmission. Investor sentiment remains sensitive to headline inflation and labor-market surprises.
Sector impacts
Financial metrics indicate rate-sensitive sectors face renewed pressure under a higher-for-longer scenario. Real estate and utilities show elevated duration risk. Banks may benefit from wider net-interest-margin prospects if elevated rates persist. Consumer discretionary exposure rises if wage growth lags price momentum.
Outlook
According to quantitative analysis, the current configuration implies persistent policy uncertainty until a sequence of incoming macro prints clarifies inflation dynamics. Market data shows the next three CPI and payroll releases will materially shift the conditional probabilities reported here. Investors should monitor those releases and evolving forward-rate curves for updated signals.
