5 min readMay 13, 2021


There was strong expectations for yesterday’s CPI print where various previews such as this one from forexlive were hinting that it may be a non-event:

US CPI may not tell us anything we don’t already know

Well we knew that it was going to be hot, we just didn’t think it was going to be THAT hot with Core CPI coming in at 4.2% vs 3.6% expected y/y, and 0.8% vs 0.2% m/m. Quite the burst in a very short space of time!

But these charts from the Washington Post gives some reassuring perspective… or does it??

Year on year base effects was well expected but if we eyeball the 2nd chart, an overshoot of the expected 3.6% looks somewhat acceptable under the Fed’s FAIT (Flexible Average Inflation Targeting), but at 4.2%, this is starting to look concerning especially if we consider that the next May CPI reading is expected to come in even higher!


Clarida speaking after the CPI yesterday didn’t exude the same confidence as before saying he was “surprised” by the sharp rise in inflation, and if we hear more of this from other Fed speakers, we could see a shifting tone from the Fed. If inflation continues to rise for May and June periods, I think Tapering will come soon after. This is not to say that rate hikes will and for that there is a few variables to consider, labour market slack being absorbed I view as being of most importance. Good read on this:

Rapidly rising house prices (fastest rise since 2006 and above economists’ expectations) is another concern that supports the idea that the Fed should not delay tapering (especially of Mortgage-backed securities) and it also isn’t quite clear inflation will be ‘transitory’. If you’ve ever studied foundation level Economics you may remember that prices tend to be ‘sticky’, such that even if supply chains loosen up, we may not see a substantial pullback in prices, and the longer it stays up, the more likely it will stick.


This brings me back to the period earlier this year where it seems to me we have a similar setup to what we’re about to see in the near-future — a burst of inflation expectations and bond market volatility.

DXY vs MOVE index (Purple)

Heightened bond volatility (Move Index) was accompanied by USD strength, in parts… USD was on a strong downtrend in Oct and the increased bond volatility was followed by bursts of USD strength; Feb/Mar volatility was more pronounced as bonds sold off aggressively that resulted in a large USD short squeeze particularly against JPY.

DXY vs 5yr Forward inflation breakevens (Orange) and 5yr Yield (Green)

Bursts in inflation expectations also preceded rising trends in bond yields followed by USD strength.

NDX vs Inflation breakevens

We can the nervousness that follows bursts of inflation expectations in US equities (looking at Nasdaq100 due to its sensitivity to rates).

It’s clear rising inflation expectations exerts upside pressure on Yields and USD while putting pressure on Equities and we’ve seen another burst since the NFP miss last Friday.


From the initial release, we saw USD spike upwards on the strong print — understandable, as this implies the FED hiking cycle coming sooner than later. But I didn’t think the knee-jerk USD strength was justified and bought Gold on the idea that this was negative in real terms and much to my satisfaction, the USD sold off below pre-CPI levels. But satisfaction was short-lived as bonds continued to sell off sending yields higher, Gold trading back to the lows where I had bought the dip, while equities continued to sell-off on the nervousness of earlier Fed tightening. Begrudgingly, I exited my long Gold position and sought to think things over and eventually concluded:

US 5 year Yield (Green) vs Real Yield (Blue)
US 10year Yield (Green) vs Real Yield (Blue)

Both nominal and real yields plunged on the NFP miss on May 7th, and real yields plunging on the CPI miss while nominals kept shooting higher dragging up real yields with it.

This is just purely a hunch based on what we saw yesterday and what we saw happen in earlier this year, and if it turns out to be true, Tech stocks will be under pressure and could cause a spillover to broad risk markets as they make up almost 1/5th of the S&P500. Further, the consensus short USD long Cyclical/Reflation theme could stall amid the nervousness about a potential hiking cycle coming sooner.

You be your own judge but I think we are about to see another aggressive rise in yields and a brief ‘Return of the King’ USD while equity markets trade nervously sideways.