USDi: SVB-induced panic subsides into CPI; BEs bull flatten

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SVB-induced panic subsides into CPI; BEs bull flatten

The SVB-induced panic at the disco subsided today, allowing market participants to refocus on everyone’s favorite hot topic – i.e. inflation.  Indeed, the long-anticipated February CPI data finally hit the tape this morning - but with much less fanfare due the recent distractions in the banking sector and as today’s print was largely in line with consensus.

Indeed, headline CPI came in on target at +0.4% MoM/+6% YoY while the core came in at +0.5% MoM (versus +0.4% Bloomberg consensus) and in line with consensus on a YoY basis at +5.5%.  Meanwhile, the NSA print came in at slightly softer-than-expected 300.84 versus 300.881 consensus – though this was higher than NSA fixing which was offered down at 300.7 at one point yesterday in very illiquid screens, sources report. 

Digging into the finer minutia of the report, strategists at BofA highlight the following:

”…Beginning with the noncore components, food prices rose by 0.4% m/m modestly below our expectation for a 0.5% m/m increase. This marks a slight deceleration from the 0.5% m/m average seen over the prior three months. The slowdown was largely due to food at home inflation declining from 0.42% m/m in January to 0.25% m/m in February. Falling commodity prices and transportation costs are likely contributing to easing food at home inflation. However, food away from home inflation was little changed at 0.63% m/m (NSA) likely owing in part to wage costs pressures.

 

“…Energy prices meanwhile fell by 0.6% m/m, which was a larger decline than we expected (0.4% m/m). That said, the drop in energy prices was driven by a 1.7% m/m decline in energy services as prices partially retraced in the West, which offset a modest 0.5% m/m increase in energy goods.

 

“…Turning to core, the 0.45% m/m increase was driven entirely by services inflation. Core services rose by 0.62% m/m, which was 8bps above our forecast. Shelter inflation (+0.8% m/m) was once again the key driver of core services and core inflation overall. The category contributed 33bp to the 45bp increase in core inflation. OER and rent inflation remained sticky-high as both increased modestly from the January readings. Meanwhile, lodging away from home increased by 2.3% m/m and the index is now close to 14% above February 2020 levels. This likely reflects rising labor costs being passed through to consumers and strong demand for travel and leisure services.

 

“…Excluding rent and OER from core services, prices rose by 0.5% m/m according to Haver Analytics, accelerating from the 0.4% m/m pace in January. Over the last three months, the index has risen by 5.2% annualized, which is well above pre-pandemic levels and inconsistent with the Fed's 2% target. Within the category, transportation services rose by 1.1% m/m supported by a 6.4% m/m jump in airfares and a 1.6% m/m (NSA) increase in motor vehicle insurance. The rise in airfares was much stronger than we expected (+1.0% m/m). Meanwhile, we expect motor vehicle insurance will continue to rise at a rapid clip in the near-term. Recreation services also rose by 1.2% m/m as broad-based increases in pet services, video and audio services, and admissions pushed the category higher. Medical care services prices did fall again (-0.7% m/m) providing some offset to the other categories; however, the decline continues to reflect lagged data used to estimate health insurance.

 

“…While core services remained sticky, core goods prices were unchanged in February (-0.01% m/m). The flat reading on core goods reflected a 2.8% m/m drop in used car prices, well below our expectation for a 0.5% m/m decline. Outside of used cars, there are few signs of goods price deflation. Indeed, core goods ex used cars rose by 0.4% m/m and has accelerated over the last three months. Apparel and household furnishings inflation remained elevated in February. We have been expecting both to moderate or decline modestly given the ongoing improvement in supply chains and better inventory-to-sales ratios. However, we have yet to truly see those factors take hold.”

In all, BofA believes that “the report continues to illustrate the sticky inflation problem the Fed is currently facing. Given the Fed's focus on core services ex housing services, it will not be encouraged by core services ex rent and OER advancing by 0.5% m/m in February. Financial markets have increased uncertainty about the near-term policy outlook; however, today's report supports our view for a 25bp hike in March.”

Post-data, the CPI print provided support to an inflation market that was recently ravaged amid the SVB-debacle, leading one dealer to quip that “this could be a case of throwing the baby out with the bathwater” in reference to the massive bear-steepening in the TIPS breakeven and inflation swap curves that occurred heading into today’s CPI data. 

Indeed, the jet engines were reversed today with the inflation curve bull-flattening to the tune of roughly 3-22bps in the 2y-30y sector with an added assist more generally from an improved risk tone today (Dow +1.06%, S&P +1.68%, Nasdaq +2.14%)  as most bank stocks rebounded nicely.  Notably, an ugly day in the energy trading pits (gasoline -1.83%, Brent -4.49%, WTI -5.09%) was largely swept under the rug by inflationistas this session.

"The early sense of a receding panic regarding the regional bank situation caused breaks to jump even before the strong inflation data," one dealer explained.  "And it was off to the races for most of the morning before profit0-taking and a reversal in stocks and energy seemed to temper the enthusiasm," he continued.

Flow-wise, in derivatives-space, inflation swap on the SDR today included 1y ZC swaps at 275bps and 282.5bps, 2y ZC swaps at 246bps, 251.25bps, 256bps and 257bps, 5y ZC swaps at 255bps, 7y ZC swaps at 257.25bps, 9y ZC swaps at 255.125bps, and 10y ZC swaps at 255.5bp  (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 trading at 277.25bps (+21.25bps), 5y at 243.5bps (+9.625bps), 10y at 2320.75bps (+5.875bps) and 30y at 227.75bps (+2.75bps).