USD Swaps: NFP’s first test for subtle new era; Disinflation trades

US Treasury building 9 Nov 2020
After a week that was all about rate hikes, bank risk and shifting central bank guidance, NFP returns soon to refocus attention on data.

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  • NFP’s first test for subtle new era; Banks bounce

  • BNPP: NFP and disinflation trades

  • New issues


    NFP’s first test for subtle new era; Banks bounce

    After a week that was all about rate hikes, bank risk and shifting central bank guidance, NFP returns in a couple of hours to refocus attention on data but traders say a big market-mover is not expected. “I think the central banks have dictated this week’s moves by moving from forward guidance to data headlines, so while that means those headlines are important it implies the central banks have departed the hawkish default position. NFP today would now have to go some to get a big market response,” said one dealer in London this morning.


    The forecast for the April NFP is +185K versus +236K in March, and as the market prepares, it has had to calm some choppy tides after the ECB rates decision and subsequent Lagarde comment coincided with another ripple in the febrile world of US regional banks that powered a massive sell-off by shares in names such as PacWest, Western Alliance and First Horizon.


    At the time of writing PacWest is +18% in pre-market trading. Western Alliance is +12% and First Horizon is +5%.


    These factors combined to power a drop of as much as 25bps in 2y UST yields yesterday, but a rebound in regional bank shares since than has seen those 2y yields bounce 17bps higher from yesterday’s lows (including 3bps since the NY close) and stability return to UST price action, as EGB yields rise sharply in a catch-up move.


    Currently the 10y is +2bps at 3.40%, and the 30y is also +3bps at 3.76%. This compares to rises of 11bps and 8bps in 10y gilts and Bunds respectively as they adjust to yesterday’s reversal of risk appetite in the US. S&P futures are +0.6% and the Euro Stoxx Banks index is +1.9% led by UniCredit.   


    Swap spreads are wider across the board with 2y +0.5bps at -3.125bps, 5y is +0.5bps at -17.75bps, 10y is +0.75bps at -25.5bps and 30y is +0.75bps at -68.5bps.


    Looking at this week’s busy time for central banks and the prospects for rates in the near term, the above trader said that “Lagarde stressed that the ECB is not done yet but the data is heading in the right direction, UK and EU PMIs this week were as-expected-to-slightly-soft, in the US recent data has been a bit stickier but the Fed clearly seems to be done (hiking) and those forward rates are still very low so a retracement (a move lower in rates over time) would not be a surprise.” SOFR futures are 10-13 ticks lower in the reds today.


    Also, he added, “the mechanical surge in inflation (since the Russian invasion) should start to disappear from here and particularly in July and August when inflation should hit 4% in the US, even though food and energy price rises will take longer to come down.”


    “Rates really should start to head lower from here so NFP would really have to be a monster to send them much higher today,” he concluded. Perhaps this first week of May, which has offered Londoners at least their first real whiff of something resembling summer, could also prove the beginning of the end of the inflation darkness, and the first glimmer of hope that things can actually get better, as well as worse.    


    BNPP: NFP and disinflation trades

    Looking at the upcoming NFP data, strategists at BNPP (who predict a +160K headline) echoed the words of the trader in the previous section, saying that, "With the Fed hinting at a pause we think the bar for data to be strong enough for the market to re-price Fed rate hikes is high. On the other hand a soft print could extend yesterday's decline in yields and push markets to more aggressively price in rate cuts for this year.”


    It added that “the unemployment rate could tick up to 3.6% versus 3.5% prior, if labor force participation rises again, as we project. The recent pickup in insured unemployment suggests that January's 3.4% unemployment rate was the trough for the cycle. Average hourly earnings growth may hold steady at 4.2% y/y. The measure has sent a more encouraging signal about decelerating wage pressures than some alternatives.”


    And looking beyond today’s data, BNPP says that “Using our Fed forecasts for a 5.25% terminal rate and 175bp of cuts in 2024 along with other economic forecasts, these inputs favor considerable steepening in 2s5s and 5s10s curves, and suggests 10s30s curve is already too steep. Therefore, given we still see a gradual disinflation trend and a controlled recession, we favor going long 6m forward steepeners and short 10s in a 5s10s30s fly. 5s10s30s fly is only 10bp from its tightest levels seen in decades and is less punitive from a carry perspective.​”


    New issues

    • US SPV Emerald Debt Merger last night priced a $2.275bn, 6.625%, Dec 2030 NC3y secured bond at USTs +339bps via BNPP, BNS, Barclays, BofA, CIBC, Goldman, HSBC, JPM, Mizuho, RBC, Sumitomo, TorDom, USB Capital and Wells Fargo.