/STIR: Greater Two-Way Risk Heading Into CPI, With STIRs & Yields Off Hawkish Extremes

Risks to U.S. fixed income markets look a lot more balanced heading into the CPI data,

• Tsy futures positioning still screens short across the curve (per the CFTC CoT), although that has pared back from extremes and is skewed by basis trades.
• Elevated hedge fund exposure to TU shorts is still evident.
• J.P.Morgan’s Tsy client survey is skewed towards light net long positioning in the cash space, but has also pared back from recent extremes. The survey’s neutral positioning measures remain elevated.
• Some relatively sizeable buying of TY calls in recent sessions has helped the TY call/put skew back towards neutral levels.
• Short- and medium-term breakevens have seen an aggressive pullback from April highs, aided by a similar move in oil markets.
• FOMC-dated OIS shows ~45bp of ’24 cuts (recent range of 27-55bp), with the first 25bp move more than fully discounted come the end of the Nov FOMC and ~21bp of cuts priced through the Sep meeting.
• USD STIR positioning still seems short/paid to us, although recent data has helped that positioning pare back from extremes.
• All told, the move away from cycle highs in yields and hawkish extremes in the market-implied Fed policy rate path affords both the U.S. short and long ends a little more two-way risk heading into the CPI data.
• This is particularly true after yesterday’s two-way reaction to the PPI print and with 7+-Year yields sitting at the lowest levels seen since last month’s CPI data.
• Our data preview cautioned that two potential drivers are CPI-specific and won’t impact the Fed’s preferred PCE measure, but that doesn’t prevent a knee jerk market reaction.
• Also note that retail sales data will cross at the same time. This could muddy the market reaction, especially given the recent elevation of interest in economic activity data.