Trade Synopsis: Pay 10-year US SOFR 

Trade Recommendation: Pay 10-year US SOFR at CMP of 3.68, TP of 3.98 & SL at 3.48. 

Introduction: We believe the recent fall in UST yields were more a result of index extension as well as asset rebalancing for Nov end. We also believe that US data this week might be strong enough for bond yields to again inch up towards their post Trump win Nov highs. We are looking for a strong US Core CPI no at 0.33% MoM for Nov & 0.28% MoM on headline CPI. 

Core goods inflation might be back with a bang this month at 0.15% MoM from 0.05% in Oct. The fall in OER might be insignificant & other service components might remain high. This has been validated by ISM services prices paid component. Services capture 90% of the US economy and hence we don’t see super core CPI falling much especially since real wage growth remains +ve & strong. 

We find the current market pricing surprising because in Sep SEP, Fed projected that UR (unemployment rate) by end of CY24 will be at 4.4%, GDP for CY24 will be at 2%, headline PCE will finish CY24 at 2.3% & core PCE will finish CY24 at 2.6%. 10 officials voted for 4 cuts in CY24 & 9 officials voted for 3 cuts in CY24. Coming to present, UR stands at 4.2%, GDP growth for entire CY24 is likely at 2.5%+ & core PCE is likely to be at 2.9% by end of CY24. 

We see a significant risk of media reporting during the blackout period or CPI/PPI next week delivering a hawkish surprise, pushing market expectations back toward a December skip. So ideally, we should have gone paid on 2yr US SOFR but we are recommending to pay 10yr US SOFR because even in the worst case if it is a 25-bps cut, it is most definitely a hawkish cut with DOTS in Dec showing higher neutral around 3.75% & only 2 cuts shown in CY25 by FOMC members. 

Summary: Pay 10-year US SOFR at CMP of 3.68, TP of 3.98 & SL at 3.48. 

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