USD Swaps: NFP largely hits the bull’s eye; USTs bear flatten; All eyes on CPI

Target hit 17 Jan 2023
This morning’s March NFP came largely in line with expectation, but USTs are bear flattening nevertheless. Dealers look to CPI next.

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  • NFP largely hits the bull’s eye; USTs bear flatten; All eyes on CPI


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    NFP largely hits the bull’s eye; USTs bear flatten; All eyes on CPI

    After a week chock-full of softening economic data, this morning’s March non-farm payrolls release pretty much hit the bull-eyes – coming largely in line with expectations and showing some cooling of the US labor market. 


    Looking at the details, headline non-farm payrolls came in at +236k (versus Bloomberg consensus of +230k and a revised prior +326k), the unemployment rate came in at 3.5% (versus +3.6% consensus), and average hourly earnings came in at +4.2% (versus 4.3% consensus).


    Post-data, with many market participants anticipating a weaker-than-expected print after this week’s string of soft data, the knee-jerk reaction in the rates market has been a sharp bear flattening in USTs with pre-holiday illiquidity likely exacerbating the move today.  Indeed, the benchmark 2y note yield has ricocheted 15bps higher to 3.981% while the 2s10s spread has narrowed 5.8bps to -59bps. 


    In SOFR futures, the reds and green are 11 to 18.5 ticks softer while the odds of a 25tbps rate hike in May has jumped up to 70.3% - up from 52.6% just prior to payrolls.  Meanwhile, swap spreads are narrowly mixed amid paltry SOFR volumes across the board with no IG issuance in sight today.


    Ahead, given this week’s raft of softer-than-expected data and the consequent price action, more dealers are devoting plenty of time examining the upcoming releases.  And looking into next week, all eyes will be on the Big Kahuna of them all – i.e. the US CPI report for March next Wednesday (April 12th). It follows a downside surprise in the latest PCE report for February, as well as an array of weaker-than-expected data this week, with markets increasingly focusing on the growth outlook and the likelihood of a recession.  Previewing the release, strategists at Deutsche Bank highlight the following:


      ”… Current futures pricing shows an even probability of a hike and a pause at the next Fed meeting on May 3rd. Markets are then pricing in more than 3 rate cuts by year end. So the CPI release will be important for whether this more dovish pricing is maintained. Our US economists see a +0.2% MoM increase for the headline rate (vs +0.4% in February) and +0.4% for core (+0.5%). Their recent report shows that despite the soft PCE data, trend inflation remains elevated.”


    Throwing in their two cents into the pot, strategists at NatWest expect the following:


      ”… The headline CPI likely posted a 0.2% gain in March after 0.5% in January and 0.4% in February. Energy prices (an estimated -2.8%) probably weighed on the headline CPI, while food prices likely moderated. However, the latest increase in oil prices is likely to boost the energy component within the CPI in April. We estimate gasoline prices fell 5.0% in March but are on track to rebound by about 2 ½% in April.


      “…Away from food and energy, we forecast another 0.4% gain in the core CPI. On an unrounded basis, our estimate is 0.434% versus 0.452% registered in February; the latest six-month average change from September to February is 0.413%. We assume a 0.1% rise in core goods and a 0.6% gain in core services.


      “…A realization of our monthly forecast would pull the headline CPI down from 6.0% in February to 5.1% in March. In contrast, the core CPI is likely to edge up from 5.5% in February to 5.6% in March. Consequently, the March report is unlikely to ease the Fed’s inflation worries all that much heading into the May 3 FOMC meeting.”


    Currently, SOFR swaps – 2s 4.25bps (+0.25bps), 3s -12.25bps (-0.625bps), 5s -21.625bps (+0.5bps), 7s -28.875bps (unch), 10s -28.375bps (+0.125bps), 20s -62.5bps (+0.5bps), 30s -68.875bps (-0.125bps).