CPI Can Give Fed ‘Easy Out' on a Rate Hike, BMO's Davis Says

• A higher-than-expected CPI report provides the Fed with 'cover to hike' interest rates.
• A weaker CPI number could lead to significant short covering in short-duration bonds.
• BMO is watching mortgage convexity hedgers as the 'one significant seller left' in the market.
• A 30-year mortgage rate of 7.25% could trigger an acceleration of selling from these hedgers.
• BMO is calling for two rate hikes this year.
• US 10-year rates reaching 5-5.25% would present a 'larger buy' opportunity for BMO, as they don't believe rates will stay that high for long.

Earl Davis discusses the upcoming US CPI report and its implications for Fed policy and bond markets. He suggests a higher-than-expected CPI gives the Fed cover for rate hikes, while a weaker number could trigger short covering. He also highlights the potential for significant selling pressure from mortgage convexity hedgers at higher mortgage rates, which could lead to a 'violent sell-off' in long-duration bonds, creating a buying opportunity for BMO.