Buy the CPI rumor…

<p>Here's what I wrote in my <a href="https://www.forexlive.com/news/by-the-numbers-june-non-farm-payrolls-preview-15-in-a-row-20230706/" target="_blank" rel="follow">preview for non-farm payrolls</a>:</p><p>In terms of strategy, there's plenty of talk of buying bonds on a strong
non-farm payrolls print in anticipation of a lower CPI next week. The
read-through into FX for that trade would be selling a dollar pop if
non-farm payrolls are stronger.</p><p>Non-farm payrolls wasn't stronger but the bond buyers and dollar sellers were waiting. There was a whole class of investors who were salivating at near-5% yields on the 2-year yesterday but were hesitant to buy ahead of non-farm payrolls. They arrived today and 2s are down 8 bps to 4.92%, dragging the dollar down.</p><p>There's also a strong belief that Tuesday's CPI report will offer all kinds of hints about the 'golden path' that the Fed's <a href="https://www.forexlive.com/centralbank/feds-goolsbee-i-feel-like-were-on-the-golden-path-to-no-recession-and-low-inflation-20230707/" target="_blank" rel="follow">Goolsbee laid out today</a>. It's looking like there really is a good chance of a return to target inflation without a recession. CPI is forecast at 3.1% next week with estimates ranging from 2.9-3.2%. There are many more estimates to come but the chance of sub-3% inflation is real and with commodity prices still contained and housing disinflation in the pipeline for later this year, there's a good chance of staying close to 3% and falling below early in 2024.</p><p>Now the questions becomes: Do we sell the fact? If everyone is positioning for a low CPI reading, then the trade will be to fade it as profits are taken and the market starts to think about earnings risks and the possibility of a high retail sales reading the following week. I'm sympathetic to that idea, especially with the market still not fully pricing in a July hike, which I believe is a done deal.</p><p>I the meantime, I think cyclicals can rally from here as the idea of skirting a recession percolates.</p>

This article was written by Adam Button at www.forexlive.com.