USDi: BEs leave dead cat bounce in the rear-view mirror

Down red arrow 8 Apr 2022
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BEs are bear-steepening against the sharp weakness in energy today, leaving Monday’s broad-based bounce looking more like a dead cat bounce.

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  • BEs leave dead cat bounce in the rear-view mirror

  • BofA: Sticky Inflation

     

    Click here for SDR inflation swap trade

     

    BEs leave dead cat bounce in the rear-view mirror

    Nominal yields have edged another 2-6bps lower ahead of Turkey Day and TIPS are finding it difficult to keep pace in today’s morning trade - thus solidifying Monday’s broad-based rebound in breakevens as a dead cat bounce. In data today, S&P PMI surprised to the downside (Manu/Services/Composite 47.6/46.1/46.3 vs 50/48/48 forecast). 

     

    However, with energy prices giving back all - and then some – of yesterday’s bounce (gasoline -5.07%, Brent -4.52%, WTI -4.74%), the breakeven curve is back to bear steepening today – adding to the long stretch of lower marks after the October CPI release two-weeks ago.

     

    “With little inflation-specific news on the horizon and Monday’s bullishness now looking like the outlier it would be hard to imagine the inflation market recovering substantially the rest of this holiday week,” one dealer assessed.

     

    Flow-wise, in derivatives-space, inflation swap trades on the SDR thus far today have included 1y ZC swaps at 270bps, 10y ZC swaps at 258bps and 258.5bps, and 20y ZC swaps at 247.375bps (for more trades, see Total Derivatives SDR).

     

    Heading into the early afternoon trade, the 2y breakeven is trading in the screens at 242.875bps (-4bps), 5y at 236.375bps (-2.875bps), 10y at 230.5bps (-1.75bps) and 30y at 236.125bps (-1.625bps).

     

     

    BofA: Sticky Inflation

    In the shadow of the softer-than-expected October CPI release, the rates market has been trying to solve for the timing around a sustained inflation slowdown vs a one-off miss.   For their part, strategists at BofA believe that “four things are driving US inflation” and that “two will prove transitory” while “the other two drivers of inflation will take time to normalize”.  BofA expounds on its view below:

     

      ”…We believe commodity prices will only rise modestly going forward and any pass-through to general inflation will fade. Supply chains are rapidly healing due to improved capacity and, more importantly, the ongoing drop in US consumer demand for goods. Getting inflation down to 3-4% should not be all that hard.

       

      “…Getting close to 2% in the next couple years will be much harder and may not even be doable. That is because the other two drivers of inflation will take time to normalize. We believe the unemployment rate needs to get back above 5% to put wage growth on a path back to the normal 3.0-to-3.5% of recent decades. It may prove even harder to get inflation expectations under control.

       

      “…A corollary of our sticky inflation view is that policymakers, economists and investors should not ignore short-run inflation expectations. If general inflation is high enough and persistent enough, workers and firms will start to expect an inflation premium in their wage or price. In addition, workers will want to restore their real wages back to normal after many months of prices rising faster than wages. Hence it is a mistake to assume that only long-run inflation expectations matter. As economist John Maynard Keynes once said: ‘in the long run we are all dead’. “