Ahead of the U.S. CPI Release - Expectations and What to watch in the internals / Fed Fund Pricing / Technical Levels

 Overnight U.S. S&P scaled fresh peaks of 5052 but closed the day 0.10% lower. USD Index closed flat on the day , awaiting a fresh impetus for the next leg. USTs closed flat on the day.

Yields	High	Low	Close	DoD ▲
US 2Y	4.49	4.45	4.48	-0.60
US10Y	4.20	4.15	4.18	0.40
US2s10s	-0.29	-0.31	-0.30	1.00
US30Y	4.40	4.35	4.38	0.80
JGB 10Y	0.72	0.72	0.72	-0.40
DE10Y	2.38	2.33	2.36	-1.60

 The consensus expectations for the CPI data following benign revisions to the seasonal adjustment factors are on the soft side with median headline f/c of 0.15% mom and core f/c of 0.28% mom (refer below). 

The internals of the CPI print will be crucial. This is the CPI snapshot from the earlier blog entry. 

Goods inflation has been progressively declining but core services inflation has been holding up which is an often-raised subject in Fed Speeches and where a definite progress could give more confidence to the Federal Reserve to cut FFR. 

Shelter Inflation, another often talked about subcomponent, is likely to catch up to more real time measures of rental inflation like the Zillow observed rent index and contribute to the disinflationary trend. .

Snapshot	YoY	MoM	Prior YoY	Prior MoM	2023 High	2023 Low
CPI	3.30%	0.30%	3.12%	0.10%	6.35%	3.09%
Food	2.72%	0.21%	2.96%	0.22%	10.13%	2.72%
Energy	-1.99%	0.41%	-5.38%	-2.29%	8.40%	-16.54%
Core CPI	3.90%	0.31%	3.99%	0.28%	5.60%	3.90%
Core Goods Inflation	0.09%	0.00%	-0.04%	-0.30%	2.08%	-0.04%
Core Services Inflation	5.30%	0.44%	5.49%	0.47%	7.27%	5.30%
OER	6.35%	0.47%	6.68%	0.50%	8.12%	6.35%
Rent of Primary Residences	6.47%	0.42%	6.87%	0.48%	8.81%	6.47%
Shelter	6.17%	0.46%	6.53%	0.45%	8.18%	6.17%
Services	4.95%	0.46%	5.18%	0.54%	7.64%	4.95%

 

*Source:Macro Micro

There has been a sharp reversal in market pricing of rate cuts from 160 bps of cumulative rate cuts in 2024 towards late December to current pricing of 111 bps. A strong print could move the needle towards market pricing as many cuts as guided by the Federal Reserve i.e. 75 bps. However, a softer print confirms the disinflation narrative alongside Economic resilience and could see market pricing shifting more towards 125 bps of rate cuts.  

While the Technical price action confirms a break out of the H&S formation and trendline break, the fundamentals are at divergence to the technical. Yield on US2s reached a low point of 4.364% as against our identified entry point for the pay trade at 4.33%. and paying at the current levels does not look like a good risk reward since 4.50% is another resistance level and 4.73% is the target area. 

We go neutral into the CPI release.