CPI Tomorrow and 2Y Notes Put in Ceiling

Correction made on website but resending the note

The email was sent prematurely before we were able to correct, so we are resending it now, today we had PPI and they were higher than expected, but we wanted to stress that it is tomorrows CPI that we are focusing on. We apologize for the inconvenience and the corrected note is below.

We have the all important CPI report coming out tomorrow with 0.3% and Core YoY 3.6% as the expectation:

Source: MarketWatch

We can see that the US Govt 2Y has basically drawn a line in the sand at 5.15% for now signaling a near short term top in yields barring any uptick in inflation trend from the current downtrend that we have been seeing:

We can also see the massive 30Y move higher has now signaled a short term top as well with a large 11.2bp retreat from the 4.94% area:

We can also see the decent spike in yield curve dis-inversion in the following US Govt yield curve spreads we follow:

This confirms the basing top formation in the 2Y as that short rate seems to be anchored for now and saying the FRB is done raising rates.

We shared this chart recently and it shows just how much higher rates contribute to inflation now via the risk free interest mechanism that is created from the massive amounts of bank deposits and the 5.5% threshold for the Federal Funds rate as a proxy:

We view this risk free interest uptake creation as a boom for pensions and insurers to match longer term liabilities and we believe it is a massive subsidy and a much welcomed one after a decade of ZIRP.

As far as our Trackers, lets look at yesterday’s settlements which are a 2 day composite since we did not update for Monday’s holiday with the US Cash Treasury market closed, we feel compositing like this paints a better and more accurate picture for our data purposes:

As far as the MEGA8s they continue to bounce and our option hedge is not working in our favor this week, not yet at least, but it does still offer the hedge which we feel is truly necessary for any static long only proxy portfolio:

Finally we have the GFBP positions for our futures markets tracker. There are some notable changes for yesterdays close:

Ok that is it, we know the seasonals in equities coupled with the new CTA short base is leading to a melt up and this can continue despite global turmoil. The market will get less short as we rise and then we expect a renewed push lower again, so we aren’t taking the seasonals this year for face value. There is too much global chaos right now and this makes things very uncertain…ok till next time.

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