There are two ways you can look at this CPI print which is being billed as the most important data point of 2018 so far.
On one hand, it’s definitely critical and it makes sense that everyone would be obsessing over it because look what happened after that AHE beat earlier this month. One “wrong” move on the inflation front in an environment where expansionary fiscal policy, an unfunded tax cut, Fed balance sheet rundown, and jitters about foreign demand in the face of increased Treasury supply, could prove fatal for equities if the bond rout accelerates anew.
On the other hand, the fact that the entire world is focused a single CPI print is patently absurd. One number can’t prove or disprove anything and the idea that everyone across the globe is glued to their screens waiting on a number that literally nobody outside of markets knows is coming let alone gives a shit about is hilarious.
Nevertheless, here we are, having made an Everest out of a molehill.
Of course beyond the ramifications for Fed policy and the wider meaning for central banks as they attempt to stick with a gradualistic pace of normalization so as not to upend markets or otherwise upset any apple carts, the positioning heading into this number is interesting. As we noted on Tuesday afternoon, some folks are now hedging against a downside CPI surprise. On Tuesday morning, Bloomberg flagged a block trade in three-week calls on 10-year Treasurys, expiring Friday that looks like it’s designed to hedge against a rally down to 2.75%. That would be a notable move from the current ~2.83 on 10s. This comes against a backdrop where spec positioning is “bigly” short – at least according to the latest CFTC data.
Speaking of that CFTC data, BofAML is out this morning with some commentary. Here’s some quick color:
A critical CPI print … The rates market has been increasingly inflation data dependent since Q4 2017, as it is the key missing ingredient for the Fed to be confident in its hiking path. Given the 7bp move in the 10y note after the latest nonfarm payroll report on February 2 and the equity market turmoil that followed, today’s CPI print is closely monitored not only by rates investors, but across assets. Our latest survey shows that inflation has been identified as the biggest tail risk for global fund managers.
…meets the shortest positioning ever Data from CFTC has shown a build-up in net short positions from speculators in recent months along with the recovery of economic data (Chart 1).
And the latest release last week showed that non-commercial investors stood at the shortest levels ever as of Feb 6 (-$100bn in 10y equivalents, excl. ED contracts). Even after the significant stock market correction in early February, we did not see signs of risk-off capitulation from investors that might resemble episodes during August 2015 or January 2016. According to EPFR data, the week ended on February 7 saw the largest single week equity fund outflows since the data became available (-$32bn), but government bond fund inflows have been miniscule compared to 2015 and 2016 episodes (Chart 2).