STIR: Fed Cut Pricing For Today Inches Higher But Still <10% Odds Of 50bp Cut

The latest CFTC CoT report showed asset managers adding to their overall net long, while leveraged funds added to their net short.

• A reminder that the cut-off date for the survey was Tuesday August 12, which means that the reaction to the CPI data was captured, but price action and positioning swings in the second half of the week was not reflected.
• Asset managers added to their overall not long position, with net long setting in FV, TY, US & WN futures comfortably outweighing net long cover in TU & UXY futures. The cohort added ~$10mln DV01 equivalent in net long exposure across the curve and remains net long in all contracts.
• Leveraged funds added to their overall net short, with net short setting in every contract outside of net short cover in US futures. The cohort added ~$9.3mln DV01 equivalent in net short exposure across the curve and remains net short across all contracts.
• Wider non-commercial positioning (seen in the table below) saw net shorts extended in TU & FV futures, while they were pared back in TY, US & WN contracts (UXY positioning was little changed). The cohort remains net short across the curve.

Source: MNI - Market News/CFTC/Bloomberg Finance L.P.

• Fed Funds implied rates consolidate last week’s shift to not quite fully pricing a 25bp cut next month, primarily after strong PPI but also helped by Friday’s retail sales. They sit up to 1bp softer from Friday’s close for the December meeting onwards.  
• It’s ahead of a quiet docket and a quiet week more generally, with Powell’s Jackson Hole speech on Friday at 1000ET firmly in focus.
• Cumulative cuts from 4.33% effective: 21.5bp Sep, 35.5bp Oct, 55.5bp Dec, 67bp Jan and 79bp Mar.
• The SOFR implied terminal yield of 3.07% (SFRH7) is 3bp lower on the day as it continues to roughly hold the +/-5bp of 125bp of cuts priced from current levels seen since the Aug 1 payrolls report.
• Fed VC Supervision Bowman (permanent voter, dove) speaks on Bloomberg TV at 1245ET in her first remarks since last week’s mixed inflation data. She said on Aug 9 that she favors three cuts this year (unsurprising having dissented in July) and saw recent labor data as reinforcing this view.
• SF Fed’s Daly (non-voter) reiterated late Friday that two cuts this year remains a good projection. It’s clear the economy is slower but it’s not slow. 

"GERMAN GOVERNMENT SPOKESPERSON: TALKS ONGOING ON 2027 FEDERAL BUDGET, ONE OF THE GOALS IS TO LOWER TAXES ON LOW AND MEDIUM INCOMES" - Reuters

"GERMAN GOVERNMENT SPOKESMAN: U.S. TARIFFS ON EU CAR INDUSTRY NEED TO BE CUT AS AGREED BEFORE WIDER TARIFF AGREEMENT CAN BE CLARIFIED IN WRITING" - Reuters

The comments from the government spokesperson on the federal budget and income tax reform stick to previous themes and do not break new ground.

• From the coalition agreement: "We will reduce income tax for small and medium incomes in the middle of the legislative period."
• Note that the financing gap for the German federal budget totals EUR172bln through 2029. The government has remained vague on how it plans to plug that.