USDi: Muted reaction to consensus CPI; Fairly priced

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Muted reaction to consensus CPI; Fairly priced  

Nominal yields took a turn higher this afternoon, not explained by the slightly weak $23bn nominal 30y auction, sources judge. To be sure, the auction tailed 1.5bps, with little reaction initially, but then yields rose higher, by up to 7.8bps. Equities are nursing modest gains into the close (DJIA +0.1%, S&P +0.3% and Nasdaq +0.06%). The energy sector finally pulled back some (WTI -1.9%, Brent -1.38% and NYH gasoline -0.84%).   

As for the main event-  the CPI print came very close to expectations (0.2% mom/3.2% yoy) and ex-food and energy (0.2% mom/4.7% yoy) with NSA just a tad under at 305.691 (vs 305.862 forecast).

The reaction in TIPS was muted with the belly rising less than 2bps while the front end sold off around 2-3bps and the long end around unchanged. This afternoon, the levels are roughly the same and the price action has been in a relatively tight range of around 2bps.

A source remarked that the relatively stable price action in the TIPS markets going into and out of the CPI number is reflects that most feel the “front end is fairly priced” and the current trading opportunities in inflation market as a result are relatively "limited." Pre-CPI this week, the weaker BEs/higher RYs levels brought in some buying interest, with the TIPS levels now more or less looking neither cheap nor rich, a source judged.  

In ZCs swaps, 1y ZC swaps traded at 236.75bps on a total of $85m, according to the SDR.  

Currently, the 2y breakeven is at 198.4bps (-2.8bps), 5y at 227bps (+1.8bps), 10y at 234.2bps (unch) and 30y at 230.6bps (+0.3bps).

Headline and core moderate; Ex-shelter resilient – BNP Paribas  

Analysts at BNP Paribas see that the US July CPI “brought another welcome moderation in headline and core inflation that masked more-resilient ex-shelter services categories.” The bank finds:

“Goods prices and ‘revenge spending’ services categories provided the bulk of the downward impulse. Non-vehicle core goods inflation continued to trend lower, notching their biggest monthly decline since September 2020, while used vehicle prices declined for the second straight month. Revenge spending services categories declined for the fourth straight month, with airfares leading the way with another outsized decline as in June (-8.1%). Blended rent and OER inflation remained at a similar pace (0.5%) as the prior four months, off of their prior 0.7% run-rate.”

 

“However, non-housing service inflation exclusive of “revenge spending” categories remained resilient, actually ticking up to 0.5% m/m from 0.4% in June; while off its peak, the year-on-year rate ticked higher. This is not entirely surprising to us, as we continue to think a softer labor market will be required to lower inflation in this category closer to a target-consistent rate.”

BNP Paribas argues “non-housing services inflation – which Chair Powell has repeatedly called the most important component of inflation – needs to fall appreciably for the Fed to begin broaching the possibility of lowering rates.”

Overall, the bank continues to expect “a slower pace of price rises in H2 2023 than in H1 that should see core CPI inflation falling to 3.5% y/y by the end of the year (from 4.7% currently).” Ahead, BNP Paribas sees the preliminary August forecast of “0.5% m/m headline and 0.2% core” as “higher gas prices should lift the headline, but we think a similar trend in the core will prevail,” it explains.