Tsys Head Higher Post US PPI, Focus Turns To CPI Later Today

Treasury futures were near session highs after the bell and well off session lows when rates reacted poorly to PPI final demand MoM coming out higher than expected (0.5% vs 0.3% est), YoY steady vs. 2.2% est.; PPI Ex Food and Energy MoM (0.4% vs 0.2% est), YoY steady vs. 2.2% est).

• Jun'24 10Y futures made lows of 108-15, before reversing those moves as the mid-morning focus turned to Fed Chairman Powell as he called for patience in allowing higher interest rates to do their work to slow the economy and bring inflation back to 2% but said his confidence in the path of disinflation has fallen. We have opened in line with closing levels this morning trading at 109-02+
• Looking at technicals, initial support at 108-20+ (20-day EMA) a break here would open a retest of 107-04 (Apr 25 lows), while initial resistance is 109-06+/08+ (Channel top from Feb 1 high / 50-day EMA)
• Cash Treasury traded tighter on Tuesday with the 3-7yr part of the curve the best supported, yields were 4-5.5bps lower, with the 2Y yield -4.7bps at 4.815%, 10Y -4.7bps to 4.439%, while the 2y10y -0.158 at -37.736
• US CPI will be the focus today, a upside surprise will dial up concerns that the Q1 acceleration wasn’t just a bump and could see 2Y Treasury yields eye 5% again, with the start point to Fed cuts pushed further out amidst a still high bar to a rate hike, while a downside surprise would still see sensitivity but the onus is on multiple low inflation readings before cut expectations are meaningfully brought nearer.
• Looking Ahead: Busy session today with MBA Mortgage Applications, Empire Manufacturing, Retail Sales & CPI while ECB's Rehn, Muller, Villeroy & Makhlouf and Fed's Kashkari & Bowman are due to speak