Goldman Sachs: Noisy Data Beget A Mixed Response

Goldman Sachs note that "price data (both CPI and PPI) surprised substantially to the upside, in contrast to the large downside misses in the prior week on both ISM and payrolls reports (and retail sales in the same week). Although seemingly in conflict, both sets of data are consistent with reopening effects and supply constraints. Our economists believe that these distortions are transitory; while bond markets did indeed look through the misses in labor market data, U.S. Tsy yields appear to be more responsive to price data, rising sharply following the CPI report on Wednesday. Our macro PCA framework attributes about half of the move in 10-Year yields this month to the inflation factor, suggesting that markets are at the very least demanding a higher inflation risk premium in response to rising price indices. Indeed, traded inflation at several maturities has hit multi-year highs, though some portion of this repricing, particularly at shorter maturities, is a mechanical response of elevated spot prints. At current levels, intermediate inflation forwards have already exceeded our original target; we recommend maintaining this exposure on the possibility of an overshoot, given our expectation of continued price pressures in the near term, though with substantially tighter stops. In addition to widening breakevens, the nominal curve has also steepened, with the 5s30s curve closing in on recent local highs - while we think this curve can steepen more, we don't see risk/reward in our implementation (as a conditional bear steepener) as quite as attractive, and recommend taking profits."