USDi: BEs open strong but end down as risk sentiment plunges

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BEs bear steepened for the fourth consecutive session as risk sentiment soured aggressively today and sellers maintain control of the market.

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  • BEs open strong but end down as risk sentiment plunges

  • Barclays: US CPI Inflation Preview - Another month of firm core


    Click here for SDR inflation swap trade


    BEs open strong but end down as risk sentiment plunges

    TIPS breakevens did their very best to keep their heads above water after a strong opening today but then the tides shifted once nominals got a small dose of ‘bad news is good news’ (i.e. today’s softer than expected jobless claims) and embarked on a torrid bull-steepening rally (~1.5-20bps).


    And making matters worse for the inflation asset class was a steadily deteriorating risk tone intraday fueled by melting bank stocks amid SVB Financial Group’s increasing woes (Dow -1.66%, S&P -1.84%, Nasdaq -2.05%) and another soggy day in the energy trading pits (gasoline -3.18%, Brent -1.40%, WTI -1.50%) – both coming after similarly strong openings this morning


    Against this backdrop, the TIPS breakeven and inflation swaps curves continued to bear steepen for the fourth consecutive session with particular pain being felt at the very front-end today, given the aggressive nominal rally – though BEs fared much better further out the curve.  Reflecting on the recent price action, one dealer explained that “sellers still maintain control,” but that more buyers have surfaced of late versus Tuesday’s “stark indifference to catch the knife.” 


    Flow-wise, in derivatives-space, inflation swap on the SDR today included 1y ZC swaps at 302bps, 299bps, 296bps and 295bps, 2y ZC swaps at 277bps and 276.5bps, 5y ZC swaps at 259.25bps, 10y ZC swaps at 255.875bps, 254.75bps, 254.625bps, 254bps, 253.375bps and 253.25bps, 20y ZC swaps at 242.375bps, and 30y ZC swaps at 238.5bps and 238.375bps (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 in the screens is trading at 302.5bps (-20bps), 5y at 249.375bps (-4.25bps), 10y at 230.125bps (-2.75bps) and 30y at 225.125bps (-2bps).



    Barclays: US CPI Inflation Preview - Another month of firm core

    Previewing next Tuesday’s (March 14th) highly anticipated February CPI data, strategists at Barclays project that core inflation pressures held up in February, led by another month of inflation in core goods alongside elevated services inflation. The bank forecasts headline CPI to have risen 0.4% m/m, sa (+6.0% y/y) and the NSA index to be 300.797, while core CPI is forecast to increase 0.4% m/m (5.5% y/y).  Barclays digs into the finer details of its forecasts below: 


      “…Food inflation is likely to have moderated on a sequential basis. By our projections, food inflation likely rose 0.3% m/m, lower than the January print, which would bring the annual rate down to 9.4%, after having risen to 11.4% last August. The driving force behind the spike in food inflation in 2022 was the "food at home" subcomponent, in part driven by agricultural commodity costs. However, indices of agricultural commodities show that aggregate prices have dropped sharply in recent months, and given the lagged nature of transmission of these costs into retail food prices, we think this presages a further slowdown in food inflation in both monthly and annual terms.


      “…We expect core services inflation to have remained robust, at 0.48% m/m and 7.1% y/y, once again supported by strength in shelter inflation. This pace represents only a small deceleration from the prior month's reading 


      “…For shelter, we expect inflation to have nudged only slightly lower, to a still-robust c.0.6% m/m pace, led by our expectation of some disinflation in lodging away from home in February following strong prints in the prior two months. That said, data from private sources show that new rental leases are either unchanged, at a minimum, or showing outright declines, which pose some downside risks to our forecast. While we continue to anticipate a notable moderation in shelter inflation, we think it is likely to manifest only later this year, largely owing to the lagged nature of the BLS survey methodology.


      “…We forecast that core goods prices rose 0.14% m/m sa, the second consecutive month of increase, following a string of declines late last year. The rebound in core goods CPI in January materialized despite another month of deflation in used cars, which accounts for nearly 12% of the core goods basket, and pointed to a broad-based acceleration in price pressures across the other goods categories. 


      “…In February, we expect the deflation in used car prices to pause and look for a flat reading, following another large decline in January. Admittedly, the signals from high-frequency data have been conflicting recently. On the one hand, the popular Manheim index recorded a third consecutive month of increase in February, suggesting a build-up of price pressures in the used cars category. We have found that this index, lagged by 1-2 months, has a reasonable fit with used cars CPI, and our model based off of this index would suggest a robust increase in prices. Similarly, the Blackbook wholesale used vehicle retention index also recorded a monthly increase in February, its first in seven months.  On the other hand, indicators such as data from and JD Power, point to a continued decline in used car prices, albeit at a slower pace. We find that the JD Power data, adjusted for seasonality and depreciation, and lagged 1-2 months, has had good predictive power for used cars CPI recently, and suggests a small decline in February prices. Taken together, these indicators all suggest that the robust deflation in used cars prices over the last few months is likely to fade at the very minimum, and points to upside risks in the coming months. Taking a balanced view, we pencil-in a flat print for used car CPI % m/m.


      “…Beyond used cars, we continue to expect disinflation in other categories such as household furnishings and apparel (which combine to represent c.30% of core goods). While these categories recorded unexpectedly high inflation in January, part of that is likely attributable to the sharp increase in consumer demand over that period, which in our view, was partly driven by transitory influences. In our view, the slowing in the housing sector, combined with the continued shift of consumer spending away from goods, should facilitate further price declines in household furnishings. The sharp unwind in global supply chain pressures in February, if sustained, would also support continued disinflation in core goods prices. For apparel, we have been attentive to the decline in cotton prices since they peaked in early 2022, suggesting the potential for apparel deflation in both the near- and medium-term.”