CPI Cools the Dollar

What Happened

• Headline and core CPI surprised lower; breakevens dipped and long-end yields fell 7–10 bps on the release.
• The dollar softened immediately, pushing EUR and EM FX higher; DXY printed its weakest level in two weeks.
• Cyclicals and small caps squeezed higher while mega-cap tech stayed heavy; energy extended gains with crude reclaiming recent highs.

What It Means

• Cooling inflation loosens the dollar just enough to reignite the rotation trade that started earlier this month.
• Rates re-pricing was orderly—no panic—suggesting traders view this as validation of the glide path, not a new dovish pivot.
• The squeeze in cyclicals is positioning-driven; real money is still favoring cash flow and balance-sheet strength over duration-heavy growth.

What I Think

• This print buys the Fed breathing room, which keeps front-end volatility contained and supports further energy/defense sponsorship.
• The risk now is complacency: a single hot data point could snap the dollar higher and unwind today’s squeeze.
• I’m staying with real assets and keeping tech light until we see sustained participation from long-only buyers.

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Market Terms

• Breakevens — The inflation expectations implied by TIPS versus nominal Treasuries.
• Rotation Squeeze — A sharp move into cyclicals/value triggered by short covering and systematic flows.
• Duration-Heavy Growth — Stocks whose valuations depend on distant cash flows and are sensitive to rate moves.