Markets sitting this morning waiting for the CPI numbers. Not quite sure what it is anyone is expecting. I am not going to guess what the number will be, I will leave that to others, but I will venture to say that regardless of the number, the Fed is going in June -- that is stating the obvious. What matters most now is what string of data, over how many months, stays the Fed in August and, of increasing importance, September. The present run shows a cumulative probability of 117% tightening by August and less than 9% through the rest of the year.
So, the key really is August. If the market starts moving it to 50/50, it will pull up the probabilities of others and steepen the front end of the curve. The red Euros (not communists, or Bush voters, the next series of euro futures after the first four) will move to higher rates as well but more than likely keep their shape -- negative slope. Why? Everyone, or at least most everyones in the market, are betting that the economy will slow and the Fed will be easing.
Want to bet against the curve? Rather than playing the 2/10 curve trade, look for something interesting to do in the red Euros.
Getting back to CPI, a good number is one month, Fed needs more evidence than that, so changes nothing much. A bad number, probability of August ratchets higher.
What do I think? Economy is fine, 5.25% money is still cheap, Fed will stop soon but the economy won't.