A relatively strong reaction in FI to the CPI miss while gold and stocks like the look of lower rates, time to hit the profit take button?
US was a bit of a miss, at 1.4% year-on-year, lower than forecasts for 1.5%, and after 1.4%. On a basis, it was 1.4%, also lower than forecasts for 1.5% and after 1.4%.
Fixed income is having a relatively strong reaction but that response comes as a little bit of a surprise—these numbers are incredibly volatile now, and it is not apparent today’s print says that much about the medium-term outlook. Price action from here will be telling. But I suspect this is an unwarranted overreaction and if recent flow patterns hold, expect this little fixed income pop to get sold.
Stocks sure like the “lower for longer” FOMC narrative implied by the CPI miss. With the VaR melt and short squeeze story behind us and since it would appear that active equity managers are still ‘underweight’ with a talk on the street suggesting that prime brokerage leverages have flatlined. The weaker CPI miss and implying less frothy bond yields over the near term may trigger a more active buying spree for Corporates and Risk Control types heading out of blackout period as realized rates vol settles in and at the same time if our colossal network of retail traders is any indication the retail bid will continue relentlessly.
rose yesterday due to inflation, and now today it rises due to the lack of inflation. Ok
But gold was a relatively decent hedge bet into the CPI, where a higher inflation print supports the long gold inflation narrative. In contrast, a weaker data print supports a dovish FOMC.
I suspect investors will take the opportunity to sell rather than chase, way too early to take a medium-term read on CPI, but maybe not.
Inflation Swap Miss Pricing
The reflation trade has helped propel U.S. inflation expectations with both near and long-term expectations beyond what’s been realized in 25 years. Meaning there’s a risk that market-based inflation expectations are being led by the broader reflation theme seen across global markets.
Momentum is building such that irrespective of absolute core inflation, the more the or other risk assets gain, the more inflation swaps rise.
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