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Projected Rate Cuts Gain Momentum After Soft PPI Inflation Metrics

US TSYS
  • Treasury futures bounce off lows, trading steady to mildly higher after lower than expected PPI Final Demand MoM (-0.1 vs. 0.1% est), YoY (1.0% vs. 1.3% est, prior down-revised to 0.8% from 0.9%). Ex Food and Energy lower than expected as well.
  • The most scrutinized areas though will be those that feed into the Fed's preferred measure of inflation: PCE. On this front there is no reason from this report to expect any upside revisions to those expectations than had been imputed by analysts after yesterday's CPI, and perhaps some bias toward downward revisions if anything - especially based on what was reported for the key healthcare services categories.
  • March'24 10Y futures tested initial resistance of 112-19 (High Jan 4) to 112-26.5 high before settling back to 112-16.5 last (+5.5). Next technical level to watch 113-12 (High Dec 27 and the bull trigger). Curves bull steepening: 2Y10Y climbed above -20 to -17.936 high (late October 2023 level).
  • Short end rates held strong into the close, indicative of higher projected rate cuts through mid-2024: January 2024 cumulative -1.6bp at 5.313%, March 2024 chance of rate cut -77% w/ cumulative of -20.9bp at 5.120%, May 2024 fully pricing in 25bp cut now, cumulative -50.1bp at 4.828%. June 2024 cumulative -80.4bp at 4.525%. Fed terminal at 5.3275% in Jan'24.
  • Reminder: The U.S. will observe the Martin Luther King Day public holiday on Monday, January 15. For FI futures: Globex opens normal time Sunday evening at 1800ET but close at 1300ET Monday. Monday Globex re-open at 1800ET precedes normal session hours Tuesday.
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