The Night Before

Haven't written for a week. Last week saw a fairly persistent supportive stance and then a rally on Friday night when European concerns about structured credit surfaced with some warnings from credit agencies.

It was pretty much perfect for me and I stayed fairly long the whole time waiting for the break to the upside I had been calling for for a while.

Monday saw PPI surprise strongly to the upside (1.0% QoQ against 0.8%) but that only made our market shiver and shake before bouncing back to pretty much where it was before the number. That wasn't encouraging. I am always nervous when the market resists news because ultimately, the interest rate market is about economic data and the interpretation of this data. Data cannot be shoved aside because eventually the data will shove back.

It is pretty clear to me that some complacency may have set into the market about the CPI number tomorrow. If forecasts of core CPI range basically from 0.6 to 0.9 with the vast majority at 0.7-0.8, then a surprise to either side seems to me uncomfortably likely. With the market positioned basically as it was prior to the big shake-up in June, I see all the potential for a big move on the down-side. A print of 0.5-0.7 or even 0.8 may provoke little or a moderate move in the market but 0.9 or higher will cause a big sell-off and shake us all up again.

All the burns and scars I suffered in June prevent me from piling into this but I am still convinced the likely outcome is going to be under 0.9. A sell-off in the US tonight can allow me to load-up a little but if I get a chance to take some off the table at a profit prior to the number, I most certainly will.

Position: Long across the curve in futures. Slightly short in the long end overall.

Best case: Very low print CPI or big rally overnight in the US, allowing me to square it up.

Worst Case: Sell off in US (maybe a big rally in equities), followed by 0.9 or higher in CPI.....ughh