/STIR: Goldman: US Inflation Surprise Driving Bear Steepening.

Late on Friday Goldman Sachs wrote “following upside surprises in both CPI and PPI data front-end yields have now risen to price around three cuts this year.”

• “The more pronounced bear steepening in the real rates curve and a steepening SFRZ4/Z5 gap suggest that expectations for the pace of cuts beyond this year have also receded.”
• “This suggests investors continue to reassess the terminal rate for this cycle, pressuring yields higher at the longer end of the curve.”
• “The FOMC dot plot will be in focus. We have previously shown that front-end pricing does respond to the 1-year or 2-year ahead median dots, but reaction to changes in the long-run dots has historically been more muted.”
• “The message around the destination of the cutting cycle, shown in the 2025 and 2026 dots, may be more market relevant, with risks skewed towards a slower and shallower cutting cycle and thus further steepening in the curve, suggesting upside risk to our 10y yield forecasts.”
• “Reflecting the shifting balance of risks given recent inflation strength, we close our trade recommendation for receiving Dec-24 OIS (but maintain the short SFRZ4 strangle given its wide breakeven range and elevated front-end volatility).”