USDi: Another day, and another batch of inflation data supports BEs
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Another day, and another batch of inflation data supports BEs
Another day, and another troubling batch of inflation data hit the tape - both domestically and across the pond. To be sure, as expected after recent strong French, Spanish and German inflation prints earlier this week, today’s euro area HICP was above consensus at 8.5%yoy vs 8.3% while core was 5.6%yoy vs 5.3%. While stateside, this morning’s outsized jump in unit labor cost (+3.2% versus +1.6% Bloomberg consensus) was a cause for concern.
And like clockwork, Fed officials were quick to arrive at the scene with Boston Fed President Collins swooping in to state that she believes that the Fed “will need to do some additional rate increases” and that “it will be important to hold there for some time because it take a while for the effects of tighter financial conditions to work through the economy.”
Similarly, Atlanta Fed President Bostic threw in his two-cents by stating that “there is a case to be made that we need to go higher…Jobs have come in stronger that we expected. Inflation is remaining stubborn at elevated levels. Consumer spending is strong. Labor markets remain quite tight.” That said, Bostic also reiterated that he’s “still very firmly in the quarter-point move” camp and the Fed “could” be in the position to hit the pause button on rate hikes sometime this summer which helped propel stocks higher this afternoon (Dow +1.05%, S&P +0.76%, Nasdaq +0.73%).
Against this backdrop, it was another bullish day for the inflation asset class as both the TIPS breakevens and inflation swap curves continued to gingerly skip along in bull-flattening mode for the third consecutive session. Indeed, dealers marked inflation roughly another 3 to 7bps higher this session as nominals cratered once again (~4-8bps), taking the nominal 10y yield decidedly north of 4% to close out at 4.079% today.
“Breakevens enjoyed another day of significant outperformance with another round of strong wage data,” one dealer explained. “There was buying interest across the curve all day with only minor opposition and the bid tone extended to many of the off-the-run issues in dramatic fashion at times, indicating a broader and more aggressive move into the product,” he continued.
Flow-wise, in derivatives-space, inflation swaps on the SDR today included 3y ZC swaps at 279.5bps, 285bps and 282.75bps, 5y ZC swaps at 274.5bps, 275.875bps and 276.375bps, and 10y ZC swaps at 267.5bps and 268bps. (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 331.875bps (+7.125bps), 5y at 273.5bps (+6.625bps), 10y at 248.75bps (+5.25bps) and 30y at 239.875bps (+3.5bps).
Barclays: Cash is still king, sometimes – Switch 5y5y vs. 10y10y CPI swap steepener to cash
Strategists at Barclays have been recommending 5y5y versus 10y10y CPI swap steepeners, but now they favor switching this forward curve steepener position to cash, implemented through 5y5y cash BE vs. 10yfwd20y cash BE positions. Barclays expounds on this view below:
- ”… We have been recommending 5y5y versus 10y10y CPI swap steepeners; that curve remains inverted, but has become less so even as the similar forward cash curve has flattened. We continue to believe that inflation risk premium is mispriced. Following a 40y high in inflation that the Fed is struggling to bring down to target, and concerns that structural factors, which pre-pandemic were thought to be decidedly disinflationary, have turned inflationary (because of de-globalization, energy transition costs, and labor bargaining power), there is a risk that modestly high inflation continues and that the Fed will tolerate it.
“…We believe this risk should be demonstrated by an elevated inflation risk premium, the likes of which has not been apparent in the market since early 2014. With the forward cash curve flattening and the swap curve steepening, we recommend switching this forward curve steepener position to cash, implemented through 5y5y cash BE vs. 10yfwd20y cash BE positions. While we think of this as a position, not a trade, we think that timing of this favors cash not only because of recent moves, but also because we are through 30y TIPS supply and have 10y supply coming up next month.”