USD Swaps: Flatter, tighter; After Powell

 Flatter and tighter 

Fed Chair Powell’s dovish remarks yesterday and subsequent bull steepening/risk rally have clearly raised the stakes for upcoming data, most notably Friday’s employment report but also the ISM indices and core PCE due today, with the former expected to slow to 49.7 from 50.2 alongside a fall in the prices paid index. And if the Chair’s support for a December downshift turns out not to be a unanimous view, pre-blackout Fedspeak from Logan, Bowman, Barr, Barkin and Evans may tell us more over the next 36 hours.

Meanwhile following the curve moves Wednesday (see Total Derivatives), gains for long end USTs and a small selloff at the front are flattening the curve in early trading today with the 30y at 3.68% (-6bps) versus the 5y note at 3.76% (+2bps). Risk assets are edging into the red led by Dow futures after a 2.2% pop yesterday. TIPS breakevens are just off yesterday’s highs but WTI futures are a dollar stronger and testing $81.5 before the OPEC+ meeting, amid reports that the EU plans to set its Russian oil price cap at $60.     

Issuance has slowed in euros (see Total Derivatives) and paused in dollars, with USD IG CDS a touch wider after yesterday’s sharp rally.  Swap spreads are sharply tighter at 1.5bps (-0.25) in 2s, -26.50bps (-1.25) in 5s, -34.00bps (-1.00) in 10s and -73.50bps (-0.25) in 30s.

Forecasts unchanged post-Powell: BNPP  

Strategists at BNP Paribas give their initial take on the Fed Chair’s comments. First, they note the focus on a key measure of inflation and acknowledge the deceleration in the pace of tightening. However, they also note uncertainty about the terminal rate and the duration of the Fed’s restrictive policy stance:

“Powell focuses on ex-shelter core services inflation - and its link to the labor market - in reiterating more tightening needed…The Fed is set for a downshift in its hiking pace at the December meeting, but is likely to project a higher terminal rate than in September and keen to hold rates at these restrictive levels for some time.”

Ahead of non-farm payrolls tomorrow – the Bloomberg market median forecast is +200K – BNPP notes that Powell updated on his view of the labour market:

“(He) also offered 100k as the trend rate of payrolls growth - well below the 290k current 3-month average and 210k print we expect in Friday's November NFP, but in line with the pace we see arriving in Q1 next year.” 

Still, in spite of the big re-pricing seen at the front end of the curve over the last 24 hours, BNP Paribas sticks to its forecasts for the Fed in December and beyond:   

“We continue to see the Fed hiking by 50bp at its December FOMC meeting, following that up with 50bp in February and 25bp in March, at which point we see it holding fed funds at 5.25% through the balance of next year.”

New issues

• China’s Deyang Development (BBB-) plans a USD 3y Sustainability bond at 7%. Leads are CEBI, CMB and GJI.