US TSYS: Curve Steepens, Fed Cut Next Week Cemented On CPI Data

The Treasury curve bear steepened Wednesday, with the short-end outperforming after in-line CPI data pointed to a Fed cut next week. 

• Core CPI inflation was a little stronger than expected in November at 0.31% M/M (cons 0.28), but housing inflation - whose stickiness has been a concern for Fed policymakers - pulled back more sharply than expected, helping shift implied probability of a 25bp cut next week to near 100% versus <90% Tuesday.
• Additionally, analysts saw the data implying that the Fed's preferred core PCE metric would decelerate.
• Yields rose from session highs as the afternoon went on, with equities and oil pushing all-time/session highs respectively.
• Also digested were concerns over the stickiness of ex-housing services inflation over the medium term, and the 50bp Bank of Canada rate cut coming with hawkish communications.
• Long-end Treasuries would fully reverse post-CPI gains. But the shape of the curve remained steeper: 2s10s +3.06, 10.98 (L: 4.464 / H: 11.551), moving further away from the near-inversion earlier this month.
• Attention turns to PPI (to round out PCE estimates) and jobless claims data Thursday morning, with attention also on the concurrent ECB decision (25bp rate cut fully priced, attention on guidance).
• Latest levels: Mar 25 T-Note future is down 8.5/32 at 110-23.5, having traded in a range of 110-20.5 to 111-07.
• In cash, the 2-Yr yield is up 0.8bps at 4.1511%, 5-Yr is up 3.2bps at 4.1282%, 10-Yr is up 3.9bps at 4.2652%, and 30-Yr is up 5.8bps at 4.4769%.