Bonds and stocks rallied last week on the back of two pretty good inflation reports, right? I suppose but there were other things going on too so let’s take a look at how inflation expectations changed last week and see if that’s what drove markets.

The 5 year inflation breakeven fell by 2 basis points. Yes, 2.

10 year inflation breakevens fell by 2 basis points last week. Yes, 2 one-hundredths of a percent.

5 year, 5 year forward expectations fell by…wait for it…2 basis points.

Notice too that current inflation expectations are consistent with expectations prior to and just after the 2008 financial crisis. You’ll notice too that, while inflation expectations didn’t rise as much as actual inflation, they did rise during this recent bout of price hikes. Here’s 10 year breakevens plotted with the YOY change in CPI.

Now, notice one last thing, the drop in inflation expectations starting in 2014 and ending in mid to late 2016. Why did that happen?

The dollar surged and inflation expectations fell. That’s why we watch the dollar so closely and why we don’t pay a lot of attention to the details of the inflation reports. And that’s where last week gets more interesting because with everyone focused on the bond market and the Fed, the dollar fell nearly 1%.