Peak headline inflation is likely behind us. US CPI missed (actual: 0.0% MoM sa, consensus: 0.2%) by a sizable margin triggering position adjustments across assets. It also helped that the market was worried that core inflation (actual: 0.3% MoM sa, consensus: 0.5%) would prove problematic but the figure turned out to be better than feared. Our view on USD rates remains the same. We still expect a terminal Fed funds rate of 3.5% by the end of the year. This makes us a tad dovish than the current market pricing of 3.75% in 4Q22/1Q23. While market did pare bets of another 75bps hike in September, the overall move for the day was muted after an initial sharp dip in yields. Similarly, 10Y yields dipped below 2.7% (our lower bound neutral estimate) before closing about unchanged at 2.78%. 
There are a few points to consider as the US crests peak price pressures and backward-looking measures start to align with forward looking ones (including breakevens and survey expectations). First, the current environment is a tentative step towards Goldilocks, a scenario we flagged up as a possibility on Monday. This explains why risk assets extended the rally that started early July. Inflation, while still uncomfortably high, does not look like it is out of control. Second, the Fed is unlikely to be dissuaded from just one CPI print. This print may be sufficient to argue for a downshift to 50bps (our current view) but a pause at this point is extremely unlikely, especially when the labour market is firm. With the shelter component and hourly earnings still running hot, more hikes are needed. Third, tail risks of much higher inflation and therefore an even more aggressive Fed has faded somewhat. This is also reflected in the fall in implied volatility in USD rates. Overall, the developments are broadly in with our overall view that we will crest the 3 peaks - peak inflation, peak Fed action and peak Fed rhetoric in the immediate few months. Strategy wise, we are still unconvinced that the Fed needs to backpedal quickly in 2023. We also prefer to fade extremes when 10Y yields deviate from our estimated neutral range of 2.7-3.0%.
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