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Hawkish Hike Expectations Evaporate on Flat July Inflation

US TSYS

Tsy futures trading mixed after the bell, yield curves steeper but off highs on exceptionally wide range. Tsys initially surged across the board after flat July CPI read (0.2% est vs. 1.3% in June), Core 0.3%; Y/Y 8.5%, Core Y/Y 5.9%.

  • Markets still have a lot of data to absorb between now and September 16, the next FOMC policy annc. Nevertheless, Bonds quickly pared gains after the release/traded weaker from midday on while short end continued to outperform as Sep rate hike expectations snapped from strong 75bp conviction to 50bp (off immediate high of 96.76, Sep Eurodollar futures trading 96.63 +0.075 after the bell).
  • Appearing at Aspen Economic Strategy Group event, MN Fed Kashkari said the Fed needs to keep pressing ahead with rate hikes even after today's downside inflation surprise. "It doesn't change my path" laid out in June calling for a policy rate of 3.9% at the end of this year and 4.4% at the end of next year, he said. That remains true even with a recession being possible in the near term, he said.
  • Meanwhile, Tsy futures gained slightly after strong $35B 10Y note auction (91282CFF3) stopped through: 2.755% high yield vs. 2.762% WI; 2.53x bid-to-cover vs. last month's 2.34x. Indirect take-up climbs to 74.52% vs. last month's 61.33% high; direct bidder take-up recedes to 15.56 from 17.97%, primary dealer take-up falls to 9.92% vs. 20.07%.
  • Cross asset update: Stocks surged post-data (SPX eminis at 4205.0 +82.50); Spot Gold turned weaker at 1789.83 -4.46; Crude firmer (WTI +1.11 at 91.61).
  • Data on tap for Thursday: PPI Final Demand MoM (0.3% est vs. 1.1% prior), weekly claims (265k est vs. 260k prior), continuing claims (1.45M vs. 1.416M prior).
  • Currently, 2-Yr yield is down 4.9bps at 3.2203%, 5-Yr is down 3.6bps at 2.925%, 10-Yr is up 0.7bps at 2.7846%, and 30-Yr is up 4.5bps at 3.0343%.
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Tsy futures trading mixed after the bell, yield curves steeper but off highs on exceptionally wide range. Tsys initially surged across the board after flat July CPI read (0.2% est vs. 1.3% in June), Core 0.3%; Y/Y 8.5%, Core Y/Y 5.9%.

  • Markets still have a lot of data to absorb between now and September 16, the next FOMC policy annc. Nevertheless, Bonds quickly pared gains after the release/traded weaker from midday on while short end continued to outperform as Sep rate hike expectations snapped from strong 75bp conviction to 50bp (off immediate high of 96.76, Sep Eurodollar futures trading 96.63 +0.075 after the bell).
  • Appearing at Aspen Economic Strategy Group event, MN Fed Kashkari said the Fed needs to keep pressing ahead with rate hikes even after today's downside inflation surprise. "It doesn't change my path" laid out in June calling for a policy rate of 3.9% at the end of this year and 4.4% at the end of next year, he said. That remains true even with a recession being possible in the near term, he said.
  • Meanwhile, Tsy futures gained slightly after strong $35B 10Y note auction (91282CFF3) stopped through: 2.755% high yield vs. 2.762% WI; 2.53x bid-to-cover vs. last month's 2.34x. Indirect take-up climbs to 74.52% vs. last month's 61.33% high; direct bidder take-up recedes to 15.56 from 17.97%, primary dealer take-up falls to 9.92% vs. 20.07%.
  • Cross asset update: Stocks surged post-data (SPX eminis at 4205.0 +82.50); Spot Gold turned weaker at 1789.83 -4.46; Crude firmer (WTI +1.11 at 91.61).
  • Data on tap for Thursday: PPI Final Demand MoM (0.3% est vs. 1.1% prior), weekly claims (265k est vs. 260k prior), continuing claims (1.45M vs. 1.416M prior).
  • Currently, 2-Yr yield is down 4.9bps at 3.2203%, 5-Yr is down 3.6bps at 2.925%, 10-Yr is up 0.7bps at 2.7846%, and 30-Yr is up 4.5bps at 3.0343%.