Hi YXI friends,

The economic data released this morning were likely not what the Fed wants to see. The Headline CPI and Core CPI printed 0.2% and 0.3% MoM respectively, both 0.1% higher than expected. Initial jobless claims came in at 258k, 27k higher than expected. Continuing claims also beat the forecast.

The combination of these data indicate a higher risk of inflation resurgence while the labour market softens, the exact opposite of what the Fed is mandated to achieve.

What does this mean for bond yields? Let’s dive in. We have a trade setup for TLT plus a hedging idea at the end of this article.

DISCLAIMER: This newsletter is strictly educational. Any information or analysis in this note is not an offer to sell or the solicitation of an offer to buy any securities. Nothing in this note is intended to be investment advice and nor should it be relied upon to make investment decisions. Any opinions, analyses, or probabilities expressed in this note are those of the author as of the note's date of publication and are subject to change without notice.

1. CPI Surprised To The Upside

The September CPI figures now puts the Headline CPI 2.4% YoY, which continues the downward trend, but the Core CPI (CPI ex-food and energy) at 3.3% YoY, a move in the wrong direction.

Before the CPI, I warned our subscribers that both the Headline and Core CPI could surprise to the upside. My worry for the Core CPI stemmed from the Hourly Earnings of last week’s Nonfarm Payrolls, which rose by 0.4% MoM and put an upward pressure on Core CPI (see the video below - timestamped to this topic).

Services less rent of shelter, rose by a stunning 0.6% MoM, the fastest pace since April.

On a 3-month annualised basis, the Headline CPI, Core CPI, and Services less rent, have all accelerated upwards since July. While they are not yet in the trouble zone, it’s definitely not a welcoming trend in a rate cut cycle.

Zooming into the key CPI components, the upward surprise is broad-based. Food moved up by 0.4% MoM. Commodities less food and energy pretty much all accelerated except for medical care and tobacco. Medical care services and transportation services accelerated significantly.

The silver lining is that Shelter components, which accounts for a large percentage of the inflation reading, slowed in September. Both rent and owner’s equivalent rent rose by 0.3% MoM.

2. FOMC Expectations & Yield Curves

FOMC Decisions priced by Fed Funds Futures

Subscribe to YX Premium to read the rest.