AIms

📍Mark this! While the market waits for context—namely, #Warsh—here is a word on the #CPI and my yields trade... The energy sector shaved −0.437 points off the headline index, with gasoline alone accounting for −0.394 points (despite having a weighting of only 4.25%). If we exclude energy (and food), core inflation (ex-energy) was bang on 0.0%. The heaviest-weighted component is housing. Shelter sits at 35%, with OER making up 25.7% of that. Due to the autumn 2025 government shutdown, the BLS did not collect data in October and simply rolled previous figures forward—this is known as carry-forward imputation. (Note: Since mid-2025, due to funding shortages, the BLS suspended data collection in entire cities like Buffalo, Lincoln, and Provo. This data is now estimated via models (imputed), which has increased both the noise in the data and the margin of error, with the standard error at 0.04%.)Consequently, the April 2026 data collection yielded an atypical average—annualized to a single month but actually covering a much longer period. This mechanically and artificially suppressed rent inflation to a historic low. Similarly, the −7.4% YoY drop in health insurance is the byproduct of a backward-looking, technical calculation (the retained-earnings method). It does not reflect actual, current insurance premiums, yet it will continue to drag down core services inflation for months. The market is currently lulled into a false sense of security by the "disinflation" narrative, having fully priced in the June data. However, oil prices have already bounced back, and the distortion in the housing data will soon correct itself for technical reasons, potentially leading to a "hotter" inflation read once again. When the July data is released (on August 12), the market may be forced to confront the reality that inflation hasn't cooled nearly as much as believed, which could trigger significant market turbulence. Quick calculation Because gasoline prices were still low in early July, the monthly average for July is expected to come in lower than June's. As a result, despite the spot price rally, the gasoline component will remain a negative (downward-pulling) contributor in July (by roughly −6% in the base case). My expectation is a bifurcated picture for the July CPI on August 12: 1) Due to the downward pull of gasoline's base effect, headline inflation will largely stagnate (between −0.04% and +0.05% MoM), and the annual rate could slip to ~3.4%. On the surface, this will paint a reassuring, dovish picture. 2) Beneath the surface, however, core inflation—which provides a cleaner signal—could re-accelerate (hitting ~+0.22% MoM, and potentially rising from 2.6% to 2.7% YoY). This is because the factors that skewed the June data to the downside (such as the statistical anomalies in housing data and the drop in auto insurance) will normalize. The deceptively low headline inflation will lull the market to sleep, sustaining the complacent narrative of "ongoing disinflation." Then comes August OpEx (options expiration). The market's order books will be thin and vulnerable, with low liquidity. By this point, the late-July and August oil price rebound will be fully baked into the monthly averages. The base effect will flip, as the August average price will heavily exceed the low July average. The Result: The market receives a hot inflation report that confirms the flare-up in energy prices. This will deliver a shock to the system. But the real warning sign will be the spike in core inflation lurking beneath the calm surface on August 12—just 9 days before a highly vulnerable OpEx. I wrote about this back in May. THE TRADE As you know, I'm long $TLT puts at 10-20 deltas, and buying more. But for what tenor? The best way to play the rise in bond yields is through deep out-of-the-money (OTM) put options. The MOVE index is currently very low, sitting at the bottom of its range, meaning vol is cheap. When yields spike, MOVE will go to the 150s. My deep OTM put profits from the drop in bond prices, but it pays out massively from the expansion in volatility and the vol of vol. Since it is difficult to pinpoint the exact day yields will spike, short-dated options will just get eaten alive by theta. Therefore, I am executing a ladder strategy: 1) Core position is a 4-6 month exposure: This covers the August vulnerability, the September inflation bounce, and the year-end deluge of US Treasury issuance. When the option has only 6-8 weeks left to expiration and theta decay starts to accelerate exponentially, I roll it: I sell it and buy a fresh 4-6 month option. 2) Vega trade at 9-12 month exposures: This is a bet on an upside mean-reversion in the MOVE index. This trade can be executed at the retail level via the $TLT ETF, or at an advanced level using $ZB / $UB futures options or even OTC swaptions. With $TLT currently trading around $84.50, a 100-basis-point (1%) spike in yields would trigger a roughly 15% drop in $TLT (down to the $72 neighborhood). Buy $TLT put options with a $70–$75 strike (deep OTM) and a 4-6 month expiration. THE RISK The risk is the "benign grind-down." If the economy slows down—triggering a growth scare—a flight-to-quality will drive capital into bonds. Yields will fall, the Fed will cut rates, and the MOVE index will remain suppressed. However, as I've previously mapped out regarding rhogamma and the rho premium embedded in rate expectations: The market is operating in an inflationary/fiscal regime. The primary fear is that inflation reignites (driven by an energy catalyst), the Fed's hands are tied, and the Treasury market revolts (yields up). In this regime, the equity and bond markets sell off hand-in-hand. "Good news" for the economy is actually "bad news" for the market because it guarantees higher interest rates. This holds true above 7008 on the $SPX. Below that level, however, the flight-to-quality kicks in. In that scenario, your Bond Put bleeds to zero, while your equity put would print big returns.