All eyes will be on CPI data due 10 June. Consensus expect a 4.2% YoY (0.5% MoM sa) print for headline CPI and 2.9% YoY (0.3% MoM) for core CPI. Inflation swap fixings put the figure closer to 4.3% YoY for headline and a slow grind lower over the coming year. In short, inflation is likely to be uncomfortably high (clearly above 3%) for several quarters. As investors assess the firming labour market and potential further upside risks to inflation (tensions between US-Iran are ongoing and investors are also worried about rising food prices down the line), speculation of a hawkish Fed ahead has become top of mind.
We are sympathetic to this view from a strategist perspective. The real Fed funds rate is about flat and will likely go deep into negative territory with May’s CPI release. Our own version of the Taylor rule also indicate that the Fed maybe too dovish. A tame CPI print would likely sooth nerves temporarily, but a hot CPI print would likely result in market participants further frontloading hawkish Fed hike pricing. Levels wise, we think frontend UST looks relatively attractive when 2-3 hikes get priced for the cycle (corresponding to 2Y yields at around 4.2%). 
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