Positioned for a CPI miss?
US markets remain narrowly mixed in the run-up to CPI with the Treasury curve flatter on the back of a rally at the long end with 30y at 3.64% (-4.3bps) while S&P futures are edging 0.1% into the green. Both recent UST price action and inflation market pricing suggest that the market may be hoping for a lowish print today. Meanwhile Bond issuance has paused and the spread curve is steeper again with 5s at -25.50bps (unch), 10s at -32.125bps (+0.50) and 30s at -70.25bps (+1.00) in mildly below-par pre-data volumes
After what dealers termed a “mixed bag” in inflation trading yesterday (see Total Derivatives), December NSA CPI traded last at 6.36939% and 6.36222% on Wednesday while January NSA CPI also went through a few times, last at 5.90863% (Total Derivatives SDR). The Bloomberg survey consensus is around 6bps higher at 6.41925% implied (296.699).
As for the details of the release, BNP Paribas expects the trend in ex-shelter core services to remain elevated “even as broader inflation cools”. The bank expects core CPI to print 0.2%m/m/6.4%yoy and, if realized, sequential core inflation would average 0.2% in Q4 compared to 0.5% over the first three quarters of last year. It continues:
- “While this would, as the Fed said in the December minutes, be another ‘welcome’ development, we do not think it will be sufficient to change materially the Fed's stance just yet.”
“This is primarily because we expect the trend in the ex-shelter cores services component – which Chair Powell has explicitly cited as being ‘the most important category for understanding the future evolution of core inflation’ - to remain elevated, even as other categories soften.”
What about the impact of the data on the Fed and the market? For the Fed, BNPP reckons that:
- “Policymakers appear to be increasingly frustrated by market pricing at odds with Fed communication, both in terms of terminal fed funds and in the timing of cuts. Paired with our expectations for the trend in ex-shelter core services to stay elevated, we think this dissatisfaction should compel policymakers to maintain a bias toward a more forceful response at the next meeting in the form of another 50bp hike.”
As for Treasuries, the bank judges that markets are positioned to the downside given the rally in rates over the past two weeks and is unenthusiastic about yields. It continues:
- “We don't find the 10y Treasury too compelling right now and expect it to trade range-bound. It could reach below 3.4% lows that we saw in early December but we think it would probably require a deeper recession and more rate cuts priced which we don't think is likely. Nevertheless, we still think the pricing for a Fed pivot is a little too premature. We think a pivot now would actually be very dangerous as the 1970s has shown that previous premature pivots led to large resurgences in inflation and still think 2023 cuts should be priced out.”
- ICBC yesterday priced $900m 3y fixed and a $600m 3y floating rate Green bonds at Treasuries +61bps and SOFR +93bps. Leads on the fixed rate tranche are ABC, BoC, Cank of Comms, CCB, CA, HSBC (B&D) and StanChart.
- Turkey (B3/B) yesterday priced a $2.75bn 10y Global. Leads are Citi, GS (B&D) and StanChart. 9.75%.