Do Nothing !! A lot is predicated on tomorrow's US CPI release

I am presently learning air rifle shooting and the first principle taught was "Do Nothing". You do nothing till the posture, the stance, the focus , the breath all align and then you slowly squeeze the trigger.... Even after squeezing the trigger you hold tight and follow up your action to see the errors and then use that as a feedback to improve next time.

Tomorrow's CPI data release is a bit like I don't know, could be this way or that way and look at the price, I don't know. The risk reward does not feel right and yada yada. A lot in trading is about "price" and the current levels are expensive for a break out trade in yields but neat for a bond rally. For me , the CPI release has a lot riding on it and a significant amount of bearishness is built into the price.

Overnight, the sell off in bonds continued unabated with the yield on US2s up 4 bps. US2s10s bear flattened 2.20 bps. US10s ended the session + 1.80 bps and US30s -0.60 bps. We saw strength in price action yesterday and the yield closed at the top of the day with resistance at 4.75% on US2s taken out ahead of the US CPI release today. The Implied FFR pricing for 2024 Rate cuts is at 61 bps.

Next levels to watch on US2s

4.80% - 4.84% is an important level which also coincides with the 61.8% Fibo of the down move from 5.26% to 4.121% followed by 5.00%. On the downside, support is seen at 4.67% and 4.56%.

Consensus expectations are for a reading of 0.30% on headline and 0.30% for Core CPI.

A 0.30% rise in mom Headline CPI translates to a 4.2% annualized pace over the 3 months and 3.06% annualized pace over 6 months period. A 0.40% mom rise on headline is very bearish bonds and a 0.20% mom number is very benign bonds and positive risk assets.

Yields could zoom straight up on a strong CPI release (closer to the 0.40% mom reading) holding the breakout level or a benign CPI report sees massive Fed Fund repricing (like a 10 bps move) in which case we hold the 4.80% resistance and start moving lower and in case we get a mixed CPI report, we meander here and wait for the PPI release to get a sense of the PCE estimates after Thursday's PPI release.

Very interestingly, the run up in yields hasn't seen USD index make new cycle highs. The pair has been consolidating since last Wednesday around the 104.20 level. We had a clear breakout from the triangle on 28 March to touch a peak of 105.10 but the progress stalled. Now we are back to support at 104.00 levels and failure to hold 103.80 - 104.00 levels portends a move lower towards 102.70 / 101.50 levels.

A lot is predicated on today's CPI print in terms of the overall direction. For me, it's a "Do Nothing" !!

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