USD Swaps: Flatter again; Banks adjust views Post-Powell
Off highs but flatter as 2y holds above 5%
UST yields have come off the peaks tested in Asian trading but remain 1-4bps higher with the 2y holding above 5% at 5.04% (+3bps) while the 10y is 3.97% (+1bp) after testing 4% again. Shorter in, a 9.9bps post-Powell jump in the fix has taken 3m LIBOR up to 5.12471% and Eurodollars are another 2.0-2.5bps softer in the reds and greens, while Fed funds futures now peak at around 5.62% implied for Aug23 before falling to 5.55% for Dec23. Swap spreads are narrowly mixed with no new deals on the screens at the time of writing with 5s at -20.75bps (unch), 10s at -27.25bps (unch) and 30s at -68.25bps (+0.125). SOFR swap flows are well above normal, led by the 5y bucket.
In the news, WSJ Fed watcher Nick Timiraos reviews the Chair’s testimony but his report (link) doesn’t appear to contain any additional Fed briefing or push back, with Timiraos concluding that Powell’s comments “laid the groundwork for a notable shift in tactics to reduce price pressures” after the Fed cheif said that “hotter inflation and hiring could lead central bank officials to alter their recently adopted strategy of raising rates in smaller quarter-point increments.”
After Powell – Banks
Bank views on Powell's testimony tend to agree that a 50bps hike is now likely this month, barring a big downside surprise in the next few data prints. They also see more upside risk to the terminal rate and/or a greater chance of a hard landing for the economy. Additionally, NatWest suggests keep reading the WSJ for confirmation on the next rate move, given that the Fed’s blackout period is approaching.
Barclays: “In the absence of a disappointing February employment release, we think a 50bp hike in March, followed by two additional 25bp hikes in May and June, will become a much more plausible outcome. This path would place the peak rate for this hiking cycle at 5.50-5.75%, under the assumption that the FOMC will see sufficient evidence, after June, that it has achieved sufficient slowing in employment and wages to warrant a pause. In such a scenario, the FOMC would most likely look to hold rates higher for longer, calling into question the 25bp cut we are now penciling in for December.”
BNP Paribas: “Fed funds pricing has shifted to a higher implied terminal upper bound (5.82% versus 5.64% pre-testimony) with an increased chance of a 50bp hike in March (41bp priced versus 32bp pre-testimony) and a 50bp hike in May (33bp versus 29bp pre-testimony). As a result, the 2y UST yield has made fresh cycle highs at 5% and the 2s10s UST curve has breached -100bp for the first time in this cycle…We continue to believe that the curve can continue to invert – potentially as far as -150bp. Increasingly, the preconditions for this outcome (higher terminal rate, potential for hiking to recession) are being met. (Still) validation and continuation of this bear flattening move are contingent upon US economic data (namely February NFP and CPI) remaining surprisingly strong. One of our core trades which may benefit is a 1y2y ATMF +25bp payer swaption.”
NatWest: “While our own Fed call still looks for a 50bps hike on March 22, understandably Powell wants optionality, and, as we suspected emphasized that he will take his cues from the upcoming key data”
“While it isn't the most ideal form of communication, given the timing of the data and the Fed meeting, presumably, the Fed Chair will float a story with Fed-insider Nick Timiraos in the Wall Street Journal ahead of March 22, during the Fed's blackout period, telegraphing either 25bps or 50bps.”
“The re-acceleration in inflation against a still-tight labor market will be a red flag for the Fed and lead to a 50bps hike (and a terminal rate of 5.75%).”
Deutsche Bank: “We infer a shift in the Fed’s risk management assessment in the direction of placing a higher probability on a recession being necessary to achieve the 2% inflation objective…The Chair’s willingness to upend prior forward guidance underscores uncertainty around the level of the fed funds rate that is ‘sufficiently restrictive’. The market should not be comfortable with the notion that a terminal rate near 5.5% is sufficient.”
“If the upcoming employment and inflation data evolve in line with our expectations, including a 300k print on February payrolls and a 0.4% core CPI print with broad-based strength, the market is likely to price 50bps for the Mar 22 FOMC meeting…The Fed is likely to deliver on these expectations rather than risk a dovish surprise…Powell’s messaging today points to increasing upside risks to our terminal rate view.”
SocGen: “Fed fund futures are now discounting a peak rate of around 5.45%, +60bps from a month ago, and this will be the reference against which Powell’s remarks and forward-looking statements will be judged…Powell is not going to commit to an end-point and will likely emphasise the need for flexibility to adjust the destination and pace of travel…The Fed simply can’t be confident that inflation is moderating in a desirable and sustainable fashion. The Cleveland Fed nowcast…estimates headline CPI at 6.2% in February, down from 6.4% in January. Core is estimated at 5.5% vs 5.6%. These would exceed consensus again and offer no leeway for bonds to attempt to turn a bearish corner.”
Callables and Formosas: JPM, SocGen
- JP Morgan sold a $50m 10y NC2 fixed callable Formosa. The EMTN matures Mar 2033, is callable annually from Mar 2025 and pays a coupon of 5.60%. Leads are Sinopac and KGI. Announced Mar 2.
- SocGen sold a $30m 15y NC7 fixed callable (non-Formosa). The EMTN matures Mar 2038, is callable annually from Mar 2030 and pays a coupon of 5.465%. Lead unconfirmed and announced Mar 8.
- Bank of Sharjah (BBB+) plans a USD 5y at around Treasuries +low 300bps. Leads are ADCB, ABKGCO, Ca, ENBD, FAB, JPM (B&D) and MASHRQ.