“CPI eve” sessions are notoriously tedious in the 2020s.

Monthly inflation reports out of the US aren’t the hold-your-breath affairs they were in 2022, but there’s still enough event risk around the data to make market participants hesitant the day before. Between that and the summer lull (which is in full effect), the pre-CPI trade felt almost completely listless this week.

Outside of China’s brush with deflation and a 40% surge+ in European natural gas, there were precious few notables. The 10-year refunding went over fine, which wasn’t surprising on the heels of Tuesday’s very strong three-year result. The auction produced only the tiniest of tails even with yields marginally lower into the event. The non-dealer take, 90.5%, compared favorably with an average of 88%. Apparently, no one was especially concerned about the looming CPI print (nor Fitch).

“Even an on-the-screws auction with slightly elevated indirect awards will be sufficient to offset concerns that the Treasury Department is saturating the market with an oversupply of bonds,” BMO’s Ian Lyngen and Ben Jeffery said, describing the results to a T hours ahead of time. Treasurys chopped around for most of the day.

Italy backtracked on the bank tax which spooked markets. Matteo Salvini and his uncompromising populism are a perennial problem. His base wouldn’t agree with that assessment, but he’s been a source of volatility (in markets and in government) for years. It sounds as though he badgered Giorgia Meloni into a controversial decision this week, and they didn’t exactly stick the landing.

The poor execution forced the finance ministry to issue a “clarification” after bank shares plunged. The index rebounded sharply on Wednesday. The whiplash isn’t a good look for Meloni’s credibility.

Oil traded at YTD highs on geopolitical tensions, where that means Kyiv intends to keep targeting Russian vessels. It’s notable that crude is bid despite China’s ongoing economic woes.

Meanwhile, forward inflation expectations are sneakily back near cycle highs.

Other than that, it feels like… well, August. It feels like August. And everything that entails.

The two figures below show interim results from this week’s JPMorgan client survey. As you can see on the left, a plurality are positioned bullishly, and almost no one is overtly bearish.

Even after a few interesting days courtesy of last week’s fireworks at the long-end of the Treasury curve, one-month realized vol on the S&P is still single-digits, and three-month realized isn’t much higher. The asymmetry from the steady grind lower is perilous in the event stocks ever do manage to get moving.

“Vol control flows remain front and center,” Nomura’s Charlie McElligott said, noting (again) that equity exposure for that cohort is 95%ile on a three-year lookback. In simple terms: Spot effectively needs to trade unchanged to avoid vol control de-leveraging. That’s only a slight exaggeration.

As for the bear steepener (upon which the fate of the universe depends), SocGen’s Subadra Rajappa doubts it’s sustainable. “If the long-end continues to sell off, the rise in inflation expectations would ultimately lead to the market pricing in rate hikes, leading to a rise in front-end yields,” she said Wednesday. “Alternatively, if the data disappoints, with the front-end pegged to Fed expectations, a rally in Treasurys would result in the flattening of the curve.”

Now on to CPI.