USDi: BEs brave new banking bombs relatively well; Illiquidity

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BEs brave new banking bombs relatively well; Illiquidity

Just when market participants thought it was safe to come out of their bunkers, bombs started to fall from the skies today from Credit Suisse - falling almost 30% at one point after losing the faith and confidence of its largest shareholder (i.e. Saudi National Bank) before and initially  ignited another global massive risk off wave this session that also hit our domestic bourses intraday.

However, mid-afternoon headlines that Swiss authorities and Credit Suisse were in talks to stem any imminent demise served as a lifeline for broader risk sentiment with the major domestic equity indices paring some initially heavy losses into the close (Dow -0.87%, S&P -0.69%, Nasdaq +0.05%).

 But the U.S. inflation asset class held up surprisingly well throughout today’s renewed duress that also included (1) a 15-35bps drop in nominals yields, (2) continued sharp weakness in the energy complex (gasoline -3.4%, Brent -3.83%, WTI -4.30%), and a PPI print that came in much lower than expected (-0.1% m-o-m/4.6% y-o-y versus forecast +0.3%/5.4%) while ex-food and energy also dropped (0% m-o-m/4.4% y-o-y versus forecast +0.4%/5.2%). 

Indeed, after yesterday’s still-strong CPI data, the damage inflicted on the TIPS breakeven and inflation swaps curves intraday were relatively contained – and decidedly more impressive than the much heavier risk-off price action earlier in the week.  And with the final curtain falling on today’s trade, dealers are marking the inflation curves a mere 0.5 to 3bps lower in the 2y-30y sector.

“The morning was defined by a resumption of the Monday bank-inspired panic which destroyed most risk assets including breakevens, followed by a surprisingly strong reversal rally as buyers showed up and the late news off Swiss govt involvement galvanized the asset class further,” one dealer explained.  “The net result was impressive outperformance relative to the duration rally,” he continued, but also noted that “liquidity remains challenging in these crisis conditions and in either direction there were gaps of multiple basis points where minimal volumes changed hands.” 

Flow-wise, in derivatives-space, inflation swap on the SDR today included 1y ZC swaps at 267bps, 262bps and 260bps, 2y ZC swaps at 243.5bps and 240bps, 5y ZC swaps at 243.5bps, 241.125bps, 240bps, and239.875bps, 8y ZC swaps at 247bps, 9y ZC swaps at 244.75bps, and 10y ZC swaps at 247.125bps, 247bps, and 245bps (for all of today’s trades, see Total Derivatives SDR, which now also includes information on broker/platform).

Finally, tomorrow, the Treasury is scheduled to formally announce this month’s 10y TIPS reopening of the TIIJan33s, which Barclays expects to be for $15bn.

Heading into the final hour of trade, the 2y breakeven in the screens is trading at 270.25bps (-6.6375bps), 5y at 238.5bps (-4.5bps), 10y at 227.5bps (-2.375bps) and 30y at 225.375bps (-1.5bps).

JP Morgan: CPI and Inflation market update

Yesterday’s February CPI report showed that core CPI rose 0.45% in February, close to strategists at JP Morgan’s expectations but a touch above consensus (0.4%), and the strongest monthly gain since last September.  The YoY rate ticked down from 5.6% to 5.5%.  Energy prices declined 0.6%, while food prices increased 0.4%, and the headline index rose 0.4% m/m, bringing the NSA index to 300.84, versus a pre-release fixing of 300.73.

Importantly, JP Morgan finds that “the details of the report were strong, with core services ex-rents rising 0.50% m/m, also the first rate since September.  Meanwhile, if it had not been for a 2.8% decline in used cars CPI, which contributed a 0.09%-pt drag on m/m core CPI, the monthly increase would have been even firmer. The important rent components remained strong, with primary rent rising 0.76% and OER up 0.70%. “

However, on net, this report did not change JP Morgan’s overall outlook and the bank continues to look for a 25bp hike at next week’s FOMC meeting:

”… . While we still think we have moved past peak inflation and look for inflation to soften over the course of the year, underlying inflation remains elevated and the disinflationary process is likely to be slow. Notably,… core goods inflation has fallen to 1.3% oya, from a peak above 12% in February 2022, while rent inflation has continued to accelerate, and core services ex rents has stabilized at 6.2% oya.  Looking ahead, core goods prices are unlikely to keep falling at the pace observed over recent months.   Used car prices, for example, have fallen at nearly a 24% 3m saar pace through February and are down nearly 5% YTD, after falling 9% last year. As we’ve noted recently, the Manheim Used Vehicle Value Index, which measures the prices dealerships pay for used cars at auctions and tends to be a leading indicator of the Used car CPI, has increased in recent months, as new vehicle inventories have been slower to build than we anticipated.  This suggests we could see this component move higher in the near term, before continuing lower over the balance of the year.

 

“…Turning to rents, we look to industry data on new leases as a leading indicator.  The rate of increases in the Zillow Observed Rent Index, which measures asking rents on new leases, peaked above 17% oya in February 2022, and has softened to 6.3% oya as of last month. Data from ApartmentList show even more cooling.  Thus, given the lags with which this data makes its way into the official inflation measures, we expect to see the peak in shelter inflation within the next couple of months, though on a year-ago basis, shelter inflation should remain elevated at levels north of 6% through the end of this year.  Over the more medium term, the pace of rent inflation is likely to depend on the evolution of the labor market—if our baseline forecast of a mild recession beginning in 4Q23 is realized, rent inflation is likely to stabilize in the 3-5% range next year).   With the Fed acknowledging the lagged nature of the rent components, and the ‘transitory’ nature of goods price deflation, focus has instead been on the third category—core services ex rents.  With this component showing very little sign of cooling in the recent data, and last week’s jobs report coming in strong, we continue to look for a 25bp hike at next week’s FOMC meeting.”

Inflation-linked notes

• Credit Suisse is working on a self-led inflation-linked note maturing Mar 2025 that pays CPI +3.27%, floored at 3.27%. Eurodollar. Announced Mar 10.