Goldman: Markets Underestimating Potential For Reversal, Remain Short SFRZ3

Goldman Sachs note that “at the front-end of the U.S. forward curve, much of the recent decline in yields has come not from a material repricing of the peak rate, but from deepening inversion, i.e., the shifting of odds towards recessionary scenarios, and/or a lowering of neutral or “long run” rate assumptions.”

• “We’ve noted previously that this reset of longer term rates has been global, although we do not believe this shift is justified, and will be reversed over time. More immediately, the CPI release and Fed meeting could provide catalysts to either a slightly higher peak rate level or a partial reversal of the inversion in the forward curve.”
• “While a downside surprise in the CPI could lead markets to press on further Fed easing in H223 and beyond, we suspect the room for further declines in yields is limited given stickiness in some core categories. We also think the Fed will attempt to push back against excessive easing in financial conditions.”
• “We think markets are underestimating the risks of a hawkish outcome, especially if CPI comes in line or surprises to the upside. On a balance of risks view, we continue to like our existing December 2023 SOFR futures short position.”