USDi: BEs tepidly bounce back while EURi sinks
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BEs tepidly bounce back while EURi sinks
The U.S. inflation asset class remained impervious to the mysterious selling occurring across the pond in the EURi market this session (see EURi: Heavy front end swap selling spurs talk of stop).
Indeed, after what was described as “a rather messy start to the week” for the U.S. inflation market yesterday – ripe with heavy selling/outflows/unwinds especially at the front-end of the curve despite a decent trade in the commodities market – TIPS breakevens and inflation swaps snapped back today against the backdrop of bear steepening sell-off in nominals (~3-7bps), a modest rebound in risk sentiment (Dow +0.56%, S&P +0.70%, Nasdaq +1.01%) and continued strength in the energy complex (gasoline +1.06%, Brent +0.28%, WTI +0.43%).
Flow-wise, in derivatives-space, inflation swap trades on the SDR today included 1y ZC swaps at 198bps, 4y ZC swaps at 229.75bps, 5y ZC swaps at 234.25bps and 235.125bps, 7y ZC swaps at 240.5bps, and 25y ZC swaps at 243bps (for more trades, see Total Derivatives SDR).
Heading into the close, the 2y breakeven is going out at 205.75bps (+1.875bps), 5y at 223.75bps (+2bps), 10y at 223.5bps (+2.25bps) and 30y at 231bps (+2.5bps).
NatWest: December CPI Preview
Looking ahead, the much-anticipated December CPI data is set for release this Thursday (Jan 12th) with Bloomberg consensus looking for a headline of 0% MoM/+6.5Y YoY and a core of +0.3% MoM/+5.7% YoY. Meanwhile, the all-important NSA is expected to come in at 296.699 with sources citing decent sized trade in the fixing at 296.56 in recent sessions. NSA CPI yesterday traded last at 6.37119% (see Total Derivatives SDR) implying an index print of around 296.565, slightly under the Bloomberg survey forecast of 296.699 (6.41925% implied).
Previewing the finer details of the release, strategists at NatWest see a drag from energy and see core gains similar to November’s 0.2%:
- ”…The overall CPI appears to have declined in December after inching up 0.1% in November. We forecast the headline CPI fell by 0.2%, weighed down by significant weakness in energy costs and another soft gain in the core CPI (NWM forecast: 0.2%). On an unrounded basis, we expect the core CPI rose 0.189%, close to its November gain of 0.199% but less than half of the year-to-date average of 0.477%. Most of the expected moderation appears to be led by weakness in core goods prices—specifically vehicles and some core services including medical care. On a y/y basis, a realization of our forecast would pull down the headline CPI from 7.1% in November to 6.3% in December. (Note: A 0.6% reading from last December falls out of the y/y calculation.) Similarly, we also expect the core CPI edged down from 6.0% y/y in November to 5.6% in December as a 0.6% print from last year falls out of the calculation. We forecast the December NSACPI index prints at 296.435.
“…Within the details of our forecast, we expect a second monthly decline in the CPI for energy (forecast: 4.8% after -1.6% in November), dragged down by gasoline prices. According to AAA, average retail prices at the pump fell 12.7% last month, registering their largest monthly decline since April 2020. On a seasonally-adjusted basis, we estimate that drop translates to a decline of 9.3% in the CPI for gasoline. We also expect piped-gas prices (which are typically driven by moves in natural gas prices) were little changed last month. Spot prices for natural gas oscillated wildly in December though on an average basis (that the CPI measures) were mostly flat relative to November. In contrast, we expect residential electricity prices firmed by 1.0%, offsetting some of the weakness in gasoline and natural gas prices.
“…Meanwhile, food prices likely posted a second-monthly gain of 0.5%. Price gains for the food consumed at home component may have advanced by 0.4%, slightly lower than the 0.5% gain in November. In contrast, prices for food consumed away from home likely accelerated from a below-trend gain of 0.5% in November to 0.7% in December.
“…Within the core, we expect core goods prices remained weak for a third straight, led by declines in vehicle prices and another set of below-trend gains in prices for apparel and household furnishings. The CPI for used vehicles posted its fifth-monthly decline in November. We project this streak continued in December (forecast -3.0%). Private sector measures of wholesale used car values continue to signal weakness in retail prices. Retail prices up until October had been a bit more resilient. However, we expect the weakness seen in wholesale prices to pass through to retail prices in the coming months, especially since inventories for used cars have continued to improve. We also expect new car prices inched down by -0.1% in December. Industry sources such as J D Power, Cox automotive, etc… have indicated that average transaction prices for new have cooled in recent months. We expect this weakness to show up in the CPI in the upcoming readings. Together, new and used vehicle prices are expected to shave of 0.15pct pts from the core CPI versus the 0.14pct pt cut in the previous month.
“…On the core services side, with a 40% weight in the core CPI rent gains likely remained firmed last month. We expect the owners’ equivalent component posted a second monthly gain of 0.7% in December while rent of primary residence likely advanced by 0.7% in December, after a 0.8% gain in November. Meanwhile prices for travel-related components of such as lodging away from home (forecast: -0.4%) and airfares (forecast +0.3%) were likely little changed last month, following steeper declines in November.
“…Finally, we expect medical care prices to have posted a third monthly decline in December, dragged down by continued weakness in the health insurance component. On that note, looking at 2023, we expect medical care CPI estimates to remain weak (-0.1% \m/m in January and -0.5 % (m/m, SA) for February in Q1 2023 on account of the annual resetting of Medicare reimbursement rates. The annual changes in Medicare part B reimbursement rates almost entirely feed into the PPI and the PCE deflator, but only feed partially to the CPI for physicians’ fees and hospital services. The BLS measures physicians’ fees within the CPI by sampling prices as out-of-pocket payments by individuals, reimbursements to physicians from private health insurance carriers and from Medicare. Reimbursements from Medicare account for roughly 20% of the payments made by households. These changes are typically registered in the months of January and/or February, given the bimonthly pricing methodology of the CPI. Based on the final rule proposed by the CMS (which looked for overall cuts of 4.5%) and the passage of the latest Congress legislation (which reduced those cuts to -2.0%), we forecast physicians’ fees CPI to slip in January/February. It is also worth adding here that as per the BLS’ methodology, moves in medical care price components also feed into the health insurance component of the CPI (the other component is a change in the retained earnings ratios for health insurance carriers). As a result, weakness in physicians’ fees will be an additional indirect drag on medical care through the health insurance component.”