RATES: Oversold Into a Key Fundamental Junction; Bears Need a Focus Shift
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With US and European yields falling this morning, the trade is likely banking short profits from the February high to low slide of 6-points in Bonds especially given the potential for wild volatility today. However, it is also possible that global bond yields are declining in anticipation of a significant jump in economic uncertainty "if" today's US CPI signals a return to aggressive US Fed policy action. While the markets and even Fed members have suggested a single data point is not a trend, seeing consumer prices move in the "wrong direction" will not be taken lightly by a hyper vigilant and slightly paranoid US Federal Reserve. In fact, with the US jobs market continuing to hold up impressively in the face of progressively higher Fed funds rates, one could assume the Fed has the latitude to err to the side of over tightening.
As indicated in gold market coverage today there is the potential for a major fundamental paradigm shift throughout the markets if today's US CPI reading is perceived as a sign that the Fed efforts have not quelled inflation. However, the treasury market's focus over the last 6 months has centered on the potential for a US recession if the Fed is forced to crush demand and slow the economy to bring inflation down. Therefore, counterintuitive to classic fundamental historical action a hot inflation reading is likely to lift bonds and notes today. In our opinion, it could take an "above expectation" CPI reading (0.6% or above) to spark ideas that Fed tools will not slay inflation and in turn result in treasury prices falling and breaking a pattern od recent bullish resiliency. The North American session will start out with a weekly private survey of same-store sales and a monthly private survey of small business optimism. The highlight for global markets will come with a January reading for the US consumer price index, which is forecast to have a mild downtick from December's 6.5% year-over-year rate. The January core consumer price index (excluding food and energy) is expected to have a modest downtick from December's 5.7% year-over-year. Dallas Fed President Logan will speak during morning US trading hours while Philadelphia Fed President Harker and New York Fed President Williams will speak during the afternoon.
TODAY'S MARKET IDEAS
While we doubt the treasury trade will see a paradigm shift today (from a bullish focus of a Fed inspired recession from higher rates), a shift in focus is possible. However, bonds and notes are moderately oversold from the early February washout and predicting a major shift in trade psychology is usually a low probability gamble. Nonetheless, there is the "potential" for a classic fear of inflation washout in bond and note prices today. Therefore, pushed into the market we suggest traders buy March bonds and purchase a 127.50 put for a measure of protection against volatility and a change in overall trade focus.