USD Swaps: Collective post-CPI sigh of relief; 30y preview

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Collective post-CPI sigh of relief; 30y preview

Fed officials are likely having a collective sigh of relief after this morning’s much-anticipated November CPI showed that they may actually be getting stuff done on the efforts to slay inflation. To be sure, consumer prices surprised to the downside last month with a headline of +0.1% MoM/+7.1% YoY (versus Bloomberg consensus of +0.3% MoM/+7.3% YoY), a core of +0.2% MoM/+6% YoY (versus Bloomberg consensus of +0.3% MoM/+6.1% YoY), and an NSA of 297.711 (versus Bloomberg consensus of 298.132 and NSA fixings in the trading screens 297.98).

Reflecting on the inflation print and its implication going forward, strategists at BofA surmise the following:

”…Cooling of services components despite OER remaining firm is what Powell had been pointing to in his speech ahead of blackout. The print confirms the cooling in goods inflation that the market was anticipating following the October print, which marked an important inflection point for duration. Today's print generally affirms the message that inflation is broadly turning in components outside of shelter. This suggests that Fed messaging is probably past peak hawkishness as we see downshift in the pace of hikes and approach terminal. Today's data supports a continued moderation in rate volatility and drives a broader bid for duration as investors feel more comfortable with market pricing of the downward inflation path.”

Post-data, Treasury yields have gapped sharply lower in a bull-steepening move that currently sees the benchmark 10y note 14.8bps lower in yield at 3.463% while the 5s30s UST spread has widened 9.25bps out to -12.9bps in the screens. This rally across the curve has been led by nominal rates, with TIPS breakevens 2-4bps lower in the belly of the curve. At the front-end, red and green Eurodollars are posting 16 to 26 tick gains with the market now pricing about a 20bps lower terminal rate of around 4.8% following the CPI print.  Meanwhile, swap spreads are mixed with the wings underperforming ahead of a blank slate of IG issuance while equity markets are seeing solid risk-on move  (Dow +0.66%, S&P +1.39%, Nasdaq +2.13%).

Ahead, Treasury is closing out this week’s FOMC-truncated mini-refunding with today’s $18bn 30y bond auction after yesterday’s $40bn 3y note auction came 0.7bps through the 11:30am bid side and the subsequent $32bn 10y note auction saw a 3.5bps tail to the 1pm bid side.  Previewing today’s auction, strategists at JP Morgan believe it may be a tall order for the market given valuations:

”…Since the November auction 30-year yields have declined 51bp but remain near their highest levels of the last decade, and could offer attractive location to add duration near the end of the Fed tightening cycle. However, as we discussed last week, the decline in yields has not been completely justified by fundamentals, and 10-year yields remain about 25bp too lower after controlling for their fundamental drivers. Extending this to the long end, we find that the 10s/30s curve now appears modestly flat given medium-term Fed policy and inflation expectations. Additionally, 30-year auction tails have been highly correlated with inflation surprises. In particular, the two largest auction tails of the last couple of years took place on the same days as the largest upside surprises to CPI, namely July 13, 2021 and November 10, 2021, while the decade record stop-through at the last auction occurred on the same day as a large downside surprise in CPI. Thus, given rich valuations, low risk appetite ahead of the FOMC meeting this Wednesday, and the fact that the auction takes place just hours after the November CPI release, we think tomorrow’s auction could require some additional concession in order to be digested smoothly, particularly if the CPI report comes in above expectations.”

Currently, SOFR swaps - 2s 2.875bps (-0.25bps), 3s -13.125bps (+1.25bps)*, 5s -22.375bps (+1.25bps), 7s -31.625bps (+1.375bps), 10s -30.125bps (+0.125bps), 20s -60bps (+0.75bps), 30s -64.5bps (-0.75bps).

* adjusted for the 3bps give.