Inflation

A "lighter-than-anticipated CPI report" led to UST firmness, as it "quelled fears about tariff-related inflation and boosted enthusiasm that the Fed will cut rates in the next two or three meetings," said José Torres, senior economist at Interactive Brokers.

Federal Reserve Vice Chair Philip Jefferson said in a speech Wednesday that elevated tariffs will likely lead to inflation, but time will tell how impactful that spike in prices might be.

Even with Monday's U.S.-China tariff truce and Tuesday's inflation print, the market has felt better over the past several weeks, said Jamie Iselin, managing director and head of municipal fixed income at Neuberger Berman.

The central bank wants to let Trump's policies play out across the economy before deciding which way to move interest rates, and it's too soon to know what the impacts will be, the Federal Reserve chair said.

"The supply/demand dynamic is a headwind for the muni market this week as supply is expected to be elevated," said Cooper Howard, a fixed income strategist at Charles Schwab.

Mass deportations and tariffs on key trade partners are expected to have a "significant" negative impact on the U.S. and California economies, according to the UCLA Anderson Forecast.

Inflation is front and center this week, with the consumer price index report released on Wednesday and the producer price index on Thursday.

Municipals are underperforming USTs month-to-date, with the Bloomberg Municipal Index showing losses of 1.02% versus 0.92% for USTs as of Tuesday, but both are outperforming losses in corporates that are seeing 1.23% losses in January.

The muni market also faces an elevated new-issue calendar, which may put additional pressure on muni yields. Bond Buyer 30-day visible supply sits at $17.57 billion.

Although a new administration means policy uncertainty, most analysts see the economy growing above trend next year, although inflation will remain a concern.