Government bonds rally amid dovish bets but remain at risk from tomorrow's CPI numbers

Today government bond yields are dropping fast on both sides of the Atlantic as investors are positioning ahead of the ECB meeting tomorrow and the Federal Reserve monetary policy decision next week. The shift in positioning in the longer part of the yield curve started last week as nonfarm payrolls disappointed expectations. The straightforward thinking here is that a nonfarm payroll miss leads to lower inflation, thus "lower for longer" interest rates as central banks will extend their accommodative stance until the job market doesn't recover completely. There is also a rising feeling that tomorrow's CPI numbers will undershoot estimates. Some point to lumber falling 30% from its peak at the beginning of May. Yet, investors fail to see that lumber prices are still the highest they have even been at any point in history.

To weigh on yields today are also discussion regarding Biden's infrastructure plan, which seem to find opposition by centrists, thus less likely to pass.

The market might be right into believing that central banks may be keeping monetary policies accommodative in the short-term, but we think it is wrong in expecting that CPI numbers undershooting expectations.

Tomorrow we will be focusing on monthly core CPI numbers. April’s core inflation rose to 0.91%, the highest monthly reading since 1981. The monthly data for May is expected at 0.5%. Although expectations are lower than last month, we have to consider that any surprise in this number may indicate that prices are rising faster and might keep high for a considerable time. Remember, while yearly data are transitory, there is nothing to suggest that monthly data are.