OI Points To Further Short Cover In SOFR Whites & Reds On Thursday

The combination of yesterday’s rally in most SOFR futures and preliminary OI data points to another round of net short cover in the front end of the SOFR strip, with positioning moves in most of the whites and all of the reds biased in that direction.

• Further out, net pack OIs were essentially flat in the greens and blues, as long setting and short cover essentially offset.
• Unease surrounding French politics and a softer-than-expected PPI report generally drove the rally.
• This week’s CPI and PPI data, which provided the softest readings that we have seen in years, have resulted in downward revisions to sell-side PCE forecasts and a dovish move in the market-implied path for Fed policy rates.
• 48bp of Fed cuts are now priced through ’24, which compares to 35bp late last Friday, reversing the hawkish impact of last week’s labour market report in the process. We believe that this week’s data keeps the door open for a September rate cut.
• A reminder that last week’s CFTC CoT showed that hedge funds flipped to net short in SOFR futures for the first time since May ’23. This is probably playing into this week’s short cover.