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Thursday's inflation data could be a catalyst for an important interest rate move

  • Consumer inflation data could be big for markets if it doesn't hit the mark.
  • A hotter-than-expected CPI reading could trigger a sell-off in Treasurys and drive interest rates higher. Bond prices move opposite yield.
  • The focus is on the benchmark U.S. 10-year Treasury, a rate that is tied to many business and consumer loans, including the home mortgage.

If Thursday's consumer inflation data comes in hotter than expected, it could trigger an important interest rate move, which is being watched across financial markets.

Traders await the reaction in the benchmark 10-year Treasury yield to the 8:30 a.m. ET CPI data. The 10-year was hovering at 3 percent late Wednesday, just below a recent high of 3.033 percent. That is an important level it would need to test and break to reach 3.047 percent, an even more important technical level. A break above there could put yields on a trajectory higher.

The 10-year is important since it is the rate that many corporate and consumer loans are tied to, including home mortgages.

Economists expect the consumer price index to rise 0.3 percent, or 2.5 percent year over year on headline, with core up 0.2 percent or 2.2 percent year over year, according to Thomson Reuters.

"The CPI is going to decide the winners from the losers. PCE is something the Fed tracks, but this is the prices that most people see," said Aaron Kohli, fixed income strategist at BMO. "Which side of that tripwire of 3.033 you fall on is really up to CPI."

Kohli said whether inflation is going to start getting hotter was the topic of much debate in the bond market.

As the 10-year yield rose, so did the 2-year, and it reached a high of 2.55 percent Wednesday.

Inflation over 2 percent is important since that is the Fed's target, and if inflation rises much above that level, the market will begin to look for more Fed rate hikes. The next hike is expected in June, but the market is still unclear whether there will be one or two after that this year.

Quincy Krosby, Prudential Financial chief market strategist, said she's awaiting the reaction in the 10-year and its yield could slip if data disappoints. She said stocks could take a move higher in yields in stride, as long as it's not triggered by a sharp rise in inflation.

"When all is said and done this market is looking for direction. There's a tug of war in the market over where we're going with the economic data, the Fed, oil prices ... we could go on and on," she said.

Oil futures jumped 3 percent Wednesday with West Texas Intermediate above $71 per barrel for the first time since November 2014. Oil rose after President Donald Trump withdrew from the Iran nuclear agreement and said the U.S. would reinstate sanctions on Iran.

A 3 percent 10-year yield is important because as rates head higher to noticeable round levels some investors could see it as a reason to move some money from riskier assets into fixed income for the yield.