Today brought the first of the week's two major events with core CPI coming in right in line with the 0.4% forecast.  Headline inflation fell even more than expected at 0.1% vs 0.2% forecasts and 0.4% previously.  All of that would ostensibly imply an indifferent-to-slightly-stronger reaction in bonds, and that's exactly what we had at first, but modest gains quickly gave way to modest weakness (and modest confusion among market watchers).

There are a few potential issues spoiling the fun for today's rate rally.  The first is quite simply that it didn't show a compelling drop in core services inflation.  Granted, it didn't show an uptick either, but the burden of proof is on disinflation.  The status quo results in the current rate landscape.  We need lower inflation for a more favorable rate landscape.  

Another consideration are alternate measures of inflation such the "sticky' and "flexible" series from the Atlanta Fed.  In particular, note the uptick in 3mo annualized flexible inflation.  The gradual decrease in "sticky" inflation is promising, but the flexible uptick is troubling from a policy setting standpoint.

The WSJ article that served as the nail in the proverbial coffin this morning brought up one additional point.  While today's CPI does very little to alter the odds of tomorrow's rate hike (or rate "skip" as the case may be), the absence of significant progress in core services inflation means the Fed could use the dot plot to signal "higher for longer" in the rate outlook over the next year or two.

Bonds began the day with a modest rally down to 3.687 but popped up to 3.79% roughly 90 minutes later.  All of that volatility took place within last week's range, so it's not significant in the bigger picture, but potentially frustrating for those hoping for a friendlier reaction.