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Extending Post UK CPI Bid On FOMC Day

US TSYS
  • Tsys have extended firmer momentum after initially limited impulse from notably softer than expected UK CPI (core 6.2% Y/Y vs cons 6.8), translating to 2Y yields back near levels prior to yesterday’s stronger CAD CPI.
  • Cash Tsys trade 1-3bps richer, led by the front end to belly ahead of today’s FOMC decision.
  • TYZ3 sits at session highs of 109-10, off yesterday’s late low of 109-03 which tested but didn’t breach the bear trigger at the same level from the Sep 13 low. It remains firmly in yesterday’s range albeit on relatively subdued volumes of 230k.
  • Pertinent futures flow from London trade includes a 7k FV block buyer at 104-24.75 (DV01 $306k) and a 2.7k UXY block seller at 113-20+ (DV01 $245k).
  • The FOMC decision is clearly in focus ahead. Our full preview can be found here: https://roar-assets-auto.rbl.ms/files/55779/FedPrevSep2023-ANALYSTS.pdf.
  • Elsewhere on the docket, weekly MBA mortgage data at 0700ET plus $50B of 17-week bills at 1130ET.
A quick summary of our pre-event views:
  • The FOMC will hold rates at its September meeting, while maintaining its tightening bias.
  • Despite recent progress on inflation, which will see core PCE forecasts revised down for the first time since 2020, we expect most of the FOMC's median expectations to be largely unchanged in the latest set of quarterly projections.
  • That includes the median rate "dots" indicating one further hike by end-2023, as most participants will remain cautious of signalling that the hiking cycle is over, and 100bp of cuts in 2024.
  • Both of these are a very close call though, with risks that the 2023-24 dots shift a notch lower.
  • The interplay between the inflation forecasts and implied 2024 cuts in the Fed funds rate projections will be a key market focus of the new projections and of the press conference.
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