In the wake of a very encouraging US CPI report, I suggested the Fed may be wary of any market reaction that has the effect of easing financial conditions.

Along with inflation itself, this dynamic was the bane of policymakers’ existence last year.

At the first sign of progress, overzealous markets eager to trade less aggressive monetary policy would push the dollar and yields lower and stocks higher, at cross purposes with the Fed’s inflation-fighting agenda. We’re seeing a repeat of that currently.

Goldman’s US financial conditions gauge receded meaningfully this week. It’s now the easiest of 2023.

The index now sits at levels seen just prior to Jerome Powell’s hawkish Jackson Hole address 11 months ago.

At some point, officials will obviously have to get over this. You can’t lean against it forever, but there’s certainly an argument to be made for pushing back on price action with the potential to stoke inflation up to and until price growth is definitively on a path back to acceptable levels.

With that in mind, I wanted to reemphasize the point on Thursday, when the dollar extended the prior session’s dramatic slide, falling another 0.6% to a new 15-month low.

This is on track to be the worst week for the greenback since November when, as discussed here on Wednesday, a cool CPI report marked a turning point for the dollar. It’s déjà vu all over again in that regard. The first figure above (the financial conditions chart) is annotated to show the sheer scope of the easing associated with that fateful week eight months ago.

“The dollar has sold off sharply in response to cooler inflation and anticipation of a more patient Fed stance beyond July,” Goldman said. The bank sees dollar weakness persisting “because the same factors that weighed on [Wednesday’s] report look likely to be softer still in coming months.”

PPI figures out Thursday underscored the message from the CPI release. US producer prices fell to the brink of deflation in June, the data showed.

Treasurys, meanwhile, continued to rally, aiding and abetting dollar weakness. The CPI-inspired decline for five-year reals was nearly 20bps, among the largest single-session declines of the year. They fell another dozen basis points on Thursday.

That, you’re encouraged to note, is a “pure” financial conditions easing impulse, as I’m fond of describing it. If you were worried about equities’ adverse reaction to the recent increase in reals, worry no more, I suppose.

It’d be tempting to suggest the curve is an easy trade from here — bull steepening into the inevitable onset of Fed cuts. That was indeed the trade on Thursday. “The macro trade of 2023 was always going to be the cyclical re-steepening, which appeared to have been kickstarted in mid-March as a function of the regional banking crisis [but] when the Fed doubled down on the effectiveness of the macro prudential tools to prevent a broader contagion, the steepening was delayed, but not forgotten,” BMO’s Ian Lyngen and Ben Jeffery remarked.

“The resilience of the labor market combined with the sticky aspects of the inflation complex extended the Fed’s runway for engineering a soft landing [and] when June’s SEP added an additional 50bps of hikes to the Fed’s terminal estimate, there was little to stand in the way of the inversion trend — not until this week’s softer-than-expected headline and core inflation figures,” they added.

But BofA’s Mark Cabana cautioned against assuming a one-way bull steepener, arguing instead for a simpler read on the situation. “Going long duration at the end of the hiking cycle is a more consistent trade than the steepener which is more conditional on a harder landing outcome from the Fed,” Cabana said. 10-year US yields are likely to fall further as the Fed wraps up the most aggressive hiking cycle in a generation, according to BofA.

As for equities, given the decline in yields and the link between reals and valuations, it’s no surprise that the Nasdaq 100 was on pace for a characteristically robust showing. With Thursday’s gains, the big-tech benchmark was poised to rise almost 4% this week.