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BEs chop into the green despite ‘technical recession’ confirmation
News that the U.S. economy officially entered a ‘technical recession’ with today’s GDP print (-0.9% versus +0.4% Bloomberg consensus) kicked off a series of tremors that went through the financial landscape today.
To be sure, nominal yields cascaded sharply lower in another belly-led move (~5-15bps), Black gold opened up strong but came well off those highs (Brent +0.82%, WTI 0%) while the major domestic equity indices stumbled out of the gates only to get up, brush off the dirt and rally straight into today’s close (Dow +1.03%, S&P +1.21%, Nasdaq +1.08%).
Against this backdrop of various cross-currents, TIPS breakevens and inflation swaps had another choppy day that it ultimately saw the inflations curves pushing modestly into the green at today’s close.
Indeed, one dealer described today’s session as “volatile” where “breakevens opened with a panicky melt up” and then “spent most of the day falling from there as energy came off and the nominal rally persisted.” However, heading into the close, he explained that breakevens “spiked as a larger flow or flows took over the market and gapped the whole curve multiple basis points on no volume.”
Flow-wise, inflation swap trades thus far on the SDR today included 1y ZC swaps at 393bps, 384bps and 383bps, 2y at 338bps, 5y at 292.75bps, 293.625bps, 293.5bps and 293.375bps, 7y ZC swaps at 281.5bps, 10y ZC swaps at 274.75bps, 274.875bps and 283.5bps, 15y ZC swaps at 264bps, and 30y ZC swaps at 248.25bps and 253.375bps (for more trades, see Total Derivatives SDR).
Looking ahead, tomorrow is month-end and strategists at Barclays note that “TIPS flows remain volatile going into month-end, with four days of sizable outflows (greater than $100mn) in the past two weeks” and that “TIPS ETFs continue to see outflows, which, if anything, have accelerated in recent days”. As for the shifting dynamic this time around, Bloomberg projects the duration extensions of the Series B and Series L 1-30y TIPS indices to be 0.23y and 0.29y, respectively.
Heading into the close, the 2y breakeven is going out at 318.625bps (+1bps), 5y at 272.25bps (+3bps), 10y at 248.875bps (+1.625bps) and 30y at 227.75bps (+0.5bps).
JP Morgan: 10y TIPS breakeven technicals
Looking at the 10y TIPS breakeven through a technical lens, JP Morgan continues to think that “the 224.5-236.5bp area defines the lower end of the range for the months ahead but recognize persistent realized inflation prints provide a risk to that view.” The bank expounds on its technical view below:
- ”…10-year TIPS breakevens consolidate in the upper end of the 224.5-236.5bp support zone. That area marks out 2H22 target support zone and includes the late-Jan low, Apr-Jun equal swings objective, and summer 2021 range support….Despite the more aggressive downside momentum realized this summer, we are still looking for the area to hold as range support in the months ahead as a base-case view. As a risk scenario, we recognize that the persistent realized inflation and more aggressive Fed path could increase the probability that TIPS breakevens break lower. Tactically, the tone stays negative while below initial resistance at the 252-257bp Jun 23/24 closes and the 262-263bp crossing 50-day and 200-day MAs and Jun 21 close. Note the 270bp Jun 15 just through there. The mid-to late-Jun drop from near 280-282bp Apr-May top pattern resistance corresponded with the slide in risky markets as a more aggressive Fed path was priced. We expect that 280-282bp resistance to cap the market going forward.”