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CPI sticky as glue; Data details; Front BEs hold onto CPI gains
The ‘disinflation’ narrative hit a little pothole last month according to today’s highly anticipated CPI data. To be sure, while headline and core consumer prices came in as expected at +0.5% and +0.4% MoM, respectively, the year-over year numbers looked a bit stickier than expected -- headline CPI dipped down to 6.4% YoY (versus +6.2% consensus, +6.5% prior) while core dipped down to 5.6% YoY (versus 5.5% consensus, +5.7% prior).
Meanwhile, the all-important NSA came in at 299.170 -- slightly above the market fixing of 298.63-mid and survey consensus of 298.71. "The jump of the fixing from 298.50 one week ago to the current level suggest a lot of players decided to position themselves for an upside surprise,” one trader surmised. Digging into the finer details, strategists at BofA highlight the following:
- ”…The increase in headline CPI was largely driven by two components: energy and shelter. Together these components accounted for three-fourths of the 0.5% increase. Energy prices rose by 2.0% m/m driven by higher gas prices and shelter inflation rose by 0.7% m/m. The former was stronger than we expected, while the latter was roughly in line with our expectations. Additionally, food prices rose by 0.5%, in-line with the revised trend in 4Q.
“…Meanwhile, Core inflation was also driven by shelter inflation, which accounted for 32bp of the 41bp increase. Within core inflation services remained sticky at 0.5% m/m, in line with our expectations. Over the last three months, core services prices have risen by 6.8% annualized, well above the pre-pandemic pace. Granted much of the increase in core services reflects the ongoing strength of shelter inflation, which increased by 0.7% m/m. Within shelter Owners' equivalent rent (OER) and rent rose by 0.7%, in line with our expectations. However, lodging away from home surprised relative to our forecasts with a 1.2% m/m increase.
“…Outside of shelter. Medical care services fell by 0.7% m/m owing to a 3.6% drop in health insurance and a 0.1% decline in professional services. This was much weaker than our expected 0.1% m/m decline. Meanwhile, other services generally accelerated this month with transportation services rising by 0.9% m/m, education, and communication up 0.5% m/m and recreation services up 0.7% m/m. The Fed will likely take little comfort in these readings as it looks for signs that services inflation ex-housing is moderating.
“…While core services inflation was broadly in line with our expectations, core goods inflation was stronger than we expected, rising by 0.1% m/m. This broke a streak of three consecutive decreases in core goods prices. Used car prices did fall again (-1.9% m/m), but that streak may be coming to an end soon based on data from Manheim. Additionally, the weight of used cars was reduced in the latest update. Therefore, it should be less of a swing factor moving forward. Excluding used cars, core goods rose by 0.5% m/m and 3.5% annualized over the last three months. While this is a noticeable deceleration, it is well above the pre-pandemic pace. Additionally, it suggests that goods price deflation is not broadening outside of used cars as we have been anticipating.”
In all, BofA believes “there is not a lot of new information in this report” and that “the Fed will need to see moderation in services inflation before having confidence that 2% is achievable.” And in the wake of today’s data, several Fed officials came out swinging with the latest coming from New York Fed President Williams who stated that “lnflation is still well above our 2 percent target, and it is critically important that we reach that goal.”
In the trading screens post-data, TIPS breakevens and inflation swaps jumped across the board but only the front-end of the inflation curves are ending in the green as the session comes to a close. This comes against the backdrop of a 2.5-12bps rise in nominal yields, mixed risk sentiment (Dow -0.46%, S&P -0.03%, Nasdaq +0.57%) and lower energy prices (gasoline -1.72%, Brent -1.12%, WTI -1.26%).
“TIPS followed a familiar script at this point on these upside-prints, with the front-end eventually adjusting accordingly and further out the curve trying to rally in the aftermath but met with stronger sellers as risk assets express wariness over an even more hawkish Fed posture,” one trading explained today. “Additionally, TIPS supply is two days away and some setup for that event added to the bearish breakeven mood as the day progressed,” he continued.
Flow-wise, in derivatives-space, inflation swap trades on the SDR today included 1y ZC swaps at 277.5bps and 278.5bps, 2y ZC swaps at 263bps, 262.625bps, 264bps and 263.5bps, 3y ZC swaps at 257bps, 257.875bps, 257.5bps and 257.75bps, 5y ZC swaps at 256.625bps and 256.875bps, 8y ZC swaps at 255bps, and 10y ZC swaps at 253.75bps, 253bps and 252.875bpps (for all of today’s trades, see Total Derivatives SDR, which now also includes information on broker/platform).
Heading into the final hour of trade, the 2y breakeven is going out at 281.625bps (+8.25bps), 5y at 251.625bps (+2.875bps), 10y at 231bps (-0.5bps) and 30y at 228.125bps (-1.5bps).
JPM: Scope for 10s/30s BE curve to steepen after 30y TIPS auction
This Thursday will bring a $9bn new-issue 30-year auction, unchanged in size from last year’s new issue auction. Heading into this week’s supply, strategists at JP Morgan see scope for the 10s/30s breakeven curve to steepen coming out of the auction. The bank expounds on this view below:
- ”… Historically, 30-year auctions have been somewhat more challenging to digest compared with 5- and 10-year maturities, with end-user demand at long-end auctions stabilizing in recent years, even as takedown has continued to rise, on average, in the other sectors. Certainly, some auction concession appears to already be priced at the long end of the curve, as the 10s/30s breakeven curve has flattened materially in recent weeks, in excess of what can be explained by front-end widening. Thus, while we could see further underperformance of the 30-year sector ahead of supply later next week, there is likely room for the curve to steepen once supply has been absorbed.”