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Month/Quarter-End Positioning Outweighs Dovish Data React

US TSYS
  • It appeared month/quarter-end positioning outweighed Friday's dovish reaction to Core PCE inflation that was on balance a little softer than expected in May, printing 0.08% M/M vs consensus of 0.1% that had tilted higher with an average unrounded 0.13% M/M.
  • Treasury futures tracked higher after UofM Inflation expectations were revised lower: 1Y inflation expectations: 3.0% (cons 3.2, prelim 3.3) in June final after 3.3% in May; 5-10Y expectations: 3.0% (cons 3.1, prelim 3.1) in June after 3.0% in May.
  • Support was short lived, however, as rates as well as equities reversed course, extended lows heading into the London close. No obvious headline driver, trading desks widely cited month end, positioning squaring ahead of the first round of French elections (June 29-30).
  • Treasury futures extended lows: TYU4 taps 109-27 (-13) with attention on a firm short-term support at 109-26+, the 50-day EMA. A clear break of this average would signal scope for a deeper retracement, towards 109-00+, the Jun 10 low.
  • Curves bear steepening: 2s10s +5.384 at -37.376 (lest inverted since the beginning of the month), 5s30s +4.490 at 17.151.
  • In-line with the steepening, projected rate cut pricing through year end looks steady to mildly higher vs. pre-data levels (*): July'24 at -10% w/ cumulative at -2.5bp at 5.302%, Sep'24 cumulative -18.6bp (-17.5bp), Nov'24 cumulative -27.6bp (-26.6bp), Dec'24 -47.3bp (-45.3bp).
  • Look ahead: shortened Fourth of July holiday week next week, FOMC minutes on Wednesday, Thursday closed, June employment data next Friday.
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