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US CPI Inflation | Grifols

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If you're feeling a sense of déjà vu, but unsure, the systems will remind you that this title has already been used for a previous update.

Grifols

Grifols SA shares surged 25% late last week after the company's auditors, KPMG, approved its accounts. The stock has declined more than 40% year-to-date. Here is the latest report on Grifols by Gotham City Research.

SVB Collapse Anniversary

Just over a year ago, Silicon Valley Bank had failed, and 2-year US Dollar (USD) interest rates were rallying sharply due to an unfortunate combination of risk aversion and crowded short positioning. Reflecting on the Primary Dealers' positioning data, they and many of their clients were net short on US Treasuries, especially in near-term maturities.

The situation is more balanced today, though dealers have significantly reduced their net long positions on Treasury bonds maturing in less than 2 years, slightly extending net portfolio durations.

US CPI

Interest and commentary on the US Consumer Price Index (CPI) inflation report for February 2024, set to be released on Tuesday (12th), are at a record low since we began tracking. The latest revisions to CPI forecasts are merely reflecting higher energy prices. Whether the headline CPI averages 2.8% or 3.2% in 2024 is of minimal concern to most bond market investors.

Here is our assessment of where inflation expectations currently stand:

1. Negative outcomes: An expansion/broadening in services inflation and/or an unexpected rise in goods prices. Shelter and healthcare costs could accelerate, rising more than baseline expectations. An unforeseen inflation subcomponent could also surprise to the upside, such as prices in travel and leisure, education, etc. A combination of factors is needed to drive inflation higher, similar to what was observed in September/October 2021.

2. Neutral/expected outcome: Services inflation remains moderate or in line with expectations. Shelter and healthcare costs increase as anticipated, without necessitating revisions to baseline inflation forecasts—falling within the uncertainty range of forecasts.

3. Positive outcome: Any scenarios excluding the above two.

We lean towards outcomes favoring lower bond yields post-CPI data release, based on our previous updates.

Options Market Implied Probabilities of Fed Policy

A couple of Wall Street banks have utilized options market pricing on short-term interest rate contracts (Fed Funds and SOFR) to infer the most likely distribution of outcomes. Reports, which we haven't independently verified, suggest options betting on 1 and 5 Fed rate cuts are most popular, contrasting with the current market prediction of approximately 3-3.5 cuts. Analysts at JP Morgan view this as indicating a bi-modal distribution of outcomes, averaging around 3 cuts.

Our Interpretation: The expectation of 3 interest rate cuts is currently the median market prediction, with options traders seeking non-consensus bets for larger payoffs. i.e. Options reflect market speculation more than expectations. Those positioned in the underlying futures contracts or cash positions are likely to fare better than options speculators, regardless of the outcome.

The groundwork is laid for Goldman Sachs' baseline forecast of 5 Fed cuts this year, with uncelebrated corporate treasurers outperforming most other market participants.

Good luck!

Updates

An exception bank CEO and leader, but usually terrible at timing markets… which is a healthy thing for someone in his position…

Jamie Dimon says Fed should hold off on cutting interest rates

The same individuals who shifted at the start of the year from a bearish rates stance to predicting a 50 basis points cut at the March FOMC meeting are now uncertain about a cut in June. Meanwhile, the strongest US economic data appeared in early January, not recently.

It's very obviously they're chasing the price action, but it's difficult to gauge how much they reflect broader market sentiment. Our sense is that bond investors have done much better than the flip-flopping market commentators. i.e. implemented investment mandates and tuned out the noise.

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US CPI Inflation | Grifols

A preview of US CPI data, expectations and outcomes. 1 year anniversary of SVB failure