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The Kashkari clutch; No Fed pivot until payrolls sting
The steady drumbeat of hawk-talk from Fed officials continues unabated with the latest coming today from Minneapolis Fed President Kashkari who said that the Fed is “quite a ways away” from pausing its rate hiking campaign. “We have more work to do,” Kashkari stated this morning. “Until I see some evidence that underlying inflation has solidly peaked and is hopefully headed back down, I’m not ready to declare a pause.”
Against this backdrop – and ahead of tomorrow’s much-anticipated September payrolls report – equities flipped into the negative but are now narrowly mixed (Dow -0.3%, S&P -0.43%, Nasdaq +0.09%). Meanwhile, in rates, Treasuries are under renewed pressure with rates another 4-8bps higher in another belly-led move this session. The benchmark 10y note yield is last up 6.5bps at 3.818% while the 5s30s spread is 3.4bps narrower at -24.8bps. Further in, red and green Eurodollars are off another 7.5 to 8 ticks today as the odds of a dovish pivot continue to fade. And in swaps, spreads are narrowly mixed amid above-average SOFR volumes overall as a pickup in activity in the wings (i.e. 1y & 30y) more than offset the waning in activity in all other tenors.
Elsewhere, clients have been asking strategists at BofA if they foresee an imminent shift in stance from the Fed given other central banks' actions and the sharp risk asset moves. However, in the bank’s view, “these concerns are misplaced and that the Fed's job is still far from over.” Indeed, it believes that “the Fed will keep hiking until the labor market cracks” which means when “the Fed is confident that payrolls growth has slowed and unemployment is on an upward trajectory.” On this, BofA expects “the last hike the same month payrolls turn negative” where “historical analysis suggests the amount of tightening required to generate the Fed's expected unemployment rate by end '23 requires over 400bps of hikes over a 12 month period, last observed in the early 80s.” BofA expounds below:
- ”… Negative payrolls growth consistent with what the Fed SEP reflects is on average not achieved until 6-12 months after the Fed has delivered over 400bps of rate hikes, a scenario last observed in the early 1980s. To us, this suggests that the inflection in payrolls is still far off. While the Fed is likely to slow the pace of hikes once it hits 4% in November, we think the data is unlikely to warrant a pause until those negative payrolls prints are almost in hand. In our view this is not until March of next year. Further upside surprises in labor data will likely allow the market to continue pushing the pricing of terminal higher; we continue to recommend clients stay short front-end USTs.
“…Our economists' expectations for the terminal rate: between 475-500bps is currently about 30bps above market pricing. Some uncertainty around whether the Fed will deliver another 75bps rate hike next month as well as how long the hiking cycle will continue account for this gap. Our economists expect the Fed will keep hiking through the turn in the labor market in Q1 next year in order to ensure a labor market rebalance.
“…The Fed has made it clear that the labor market will be the guiding light on how policy is being transmitted to the real economy, and so the intense focus on the employment report is warranted. Indeed, we usually find that the front-end of the Treasury curve is much more sensitive to payrolls surprises during hiking cycles. The Fed is perceiving its progress on its inflation mandate through the employment channel, and so the strong print our economists expect vs expectations (300k vs 260k) may continue to support higher pricing of the terminal rate.”
Currently, 2s 2.375bps (+0.125bps), 3s -19.875bps (-0.5bps), 5s -24.25bps (-0.875bps), 7s -27.25bps (-0.25bps), 10s -24.375bps (+0.375bps), 20s -70.625bps (unch), 30s -71.5bps (-0.75bps).
- AIB Group is working on a 4NC3 fixed-to-FRN benchmark via BofA, Citi, GS, GDBDY, JPM and MS. A3/BBB-/BBB. Price talk: +335bps area.
- GM Financial is working on a 3y benchmark via Barclays, JPM, RBC, Santander, SMBC and SocGen. Baa3/BBB/BBB-. Price talk: +195bps area.
- CNH Industrial is working on a $350m 3y deal via BofA, JPM, MS and RBC. Baa2/BBB/BBB+. Price talk: +165bps area.
- First Abu Dhabi Bank is preparing a USD 5y Green bond at around Treasuries +145bps. Leads are Citi, DB, FAB, Mizuho and StanChart (B&D).
- Enel (Baa1/BBB+) plans USD 3y, 5y, 10y and 30y Sustainability bonds. Leads are BNPP, GS and JPM.
- TD Bank plans a USD 60y NC5 Limited Resource Capital Note (LRCN) in the region of 8.5%. Leads are Citi, GS, Santander, SocGen, TD and WFS. Baa1/BBB.
- Turkey is preparing a USD 3y Sukuk at around 10%. Books above $3.5bn. Leads are Citi, DUBAII, NBD and HSBC (B&D).