Jam-Packed

In addition to the onset of earnings season in the US, the new week brings a jam-packed data docket.

June CPI, due Tuesday, is the headliner. Steel yourself for a reinvigorated “transitory” debate.

Consensus is looking for a 4.9% YoY increase on the headline, down slightly from May (figure below). The MoM prints will be heavily scrutinized.

The June FOMC minutes, out last week, offered little in the way of new information. Policymakers were surprised at what the Committee described as a “larger than anticipated” rise in realized inflation. But they took comfort in trimmed mean measures, which paint a much more benign picture, and generally parroted their own talking points around the likely dissipation of temporary factors, including supply chain disruptions and various bottlenecks.

Jerome Powell will doubtlessly chat with lawmakers about the inflation outlook when he testifies before Congress on Wednesday and Thursday. He could do without another CPI overshoot, although thanks to the Fed’s “hawkish” (scare quotes are now obligatory to denote how relative that term is) pivot at the June meeting, Powell can claim he and his colleagues are being sufficiently vigilant.

He can also mention that bond yields have moved sharply lower of late, not exactly the kind of thing you’d expect if the market was worried about the Fed letting things get out of control. In fact, at least part of the recent rally in bonds was attributable to the idea that the Fed would abandon FAIT in favor of preserving their inflation-fighting credentials at the possible risk of tightening “too soon.” That concern may have affected growth expectations, thereby pressuring long-end yields lower, flattening the curve (figure below).

I’d still argue that a positioning shakeout and short covering accounted for quite a bit of the rally.

“We think the price action was triggered by a reassessment of the Fed’s reaction function and pessimism about further fiscal stimulus,” TD’s Priya Misra said Friday. “The moves were likely exaggerated by crowded market positioning in reflation trades and the seasonal bid to duration typically seen in July and August,” she added, noting that the bank expects Powell “to clarify that the hawkish pivot was more an exercise in risk management rather than a pullback in the Fed’s commitment to FAIT.” She did caution that any additional decline in rates “can bring about convexity hedging needs.”

Whatever the case, 10-year yields are ~50bps below their YTD highs. They’ve fallen almost 20bps in the past two weeks alone (figure below). On Thursday, we were teetering precariously on the brink of a growth scare, or at least according to the bond market.

“We’re cognizant how quickly the macro narrative has shifted from the Fed being comfortable playing catchup to realized inflation under the averaging framework to concerns the Committee might tap the brakes before it’s fully justified,” BMO’s Ian Lyngen and Ben Jeffery remarked. “What remains to be seen is precisely how sustainable this new feedback loop between stronger data and a flatter curve will prove, the risk being that the reflation-inspired steepening returns should core-CPI continue to surprise on the upside,” they added.

It’s possible the front-loaded supply schedule could bias yields higher in the new week. Treasury will sell $120 billion in 3-, 10- and 30-year debt on Monday and Tuesday.

For Goldman’s Praveen Korapaty, factors often cited for the bull flattening in the curve are “inadequate [to] justify current level of yields and curve shape.” Korapaty offered four familiar explanations for the recent price action: Delta variant concerns, the risk of a hawkish Fed, “fading fiscal optimism, particularly in the US,” and, notably, worries that China’s dovish pivot conveys something dour about the world’s second-largest economy. “None of these are particularly satisfying explanations, in our view,” Goldman’s rates team said.

In addition to CPI, auctions and Powell’s testimony, markets will digest NFIB, PPI, Empire and Philly Fed surveys, retail sales, claims and, for good measure, the preliminary read on University of Michigan sentiment for July.

That’s a daunting calendar. The rates landscape may be affected by additional tapering from the Bank of Canada, although that’s widely expected. The prospect of a hawkish lean from RBNZ was discussed widely last week, and it’ll remain topical.

Oh, and China will tell everyone what Beijing decided GDP was in Q2.