Goldman: Cooling Inflation Argues For Step Down In Pace, Not Levels

Goldman Sachs write “although the Dec CPI reading was in line with consensus, the decline follows two consecutive months of downside misses, solidifying the perception of rapidly cooling inflation.”

• “Combined with recent weakness in activity data, it has led to markets taking down not only the expected magnitude of hike at the upcoming Fed meeting but also both peak and long-run forward rate levels.”
• “While we agree with the former, we do not believe the latter makes sense.”
• “First, while it is true that activity data in the U.S. have been weak, much of this is concentrated in soft data. To the extent there is slowing in hard data, it is worth noting that the policy drag has likely already peaked and should fade over the course of the year.”
• “Second, the labor market, while admittedly lagged in showing effects of tightening, still appears to be relatively strong.”
• “Third, news outside the U.S. points to improvements in the growth trajectory there.”
• “Given the above, and the fact that yield levels are close to December lows, we would recommend that investors without existing positions consider shorts. We had previously recommended being short via selling receivers and Z23 SOFR futures, we continue to like these positions.”