USDi: BEs tightly coiled heading into April CPI
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BEs tightly coiled heading into April CPI
The major domestic equity indices skirted just below the surface for much of today’s session (Dow -0.17%, S&P -0.44%, Nasdaq -063%) as Mighty Joe Biden kicked off debt ceiling negotiations with congressional leaders which just about no one expects to be fruitful in its early stages.
Meanwhile, nominal yields nudged up a bit (~1-3bps) and energy prices continued to rebound (gasoline +049%, Brent +0.27%, WTI +0.42%) after their precipitous drop early last week. And against this backdrop, the TIPS breakeven and inflation swaps curves traded in a tight band to end narrowly mixed (+/- 1bps) as some “last-minute hedging needs” filtered through the market ahead of tomorrow’s well-anticipated April CPI release (see below).
In derivatives-space, inflation swap trades on the SDR today included 1y ZC swaps at 231.25bps, 231.75bps, 233bps, 231bps and 232.25bps, 2y ZC swaps at 232.25bps, 3y ZC swap at 235.5bps and 235bps, 4y ZC swaps at 239bps, 5y ZC swap at 256bps, 245bps, 244.75bps and 245.125bps, 6y ZC swap at 248bps, 10y ZC swap at 251.75bpps, 252bps, 251bps and 251.625bps, and 15y ZC swap at 250bps (for all of today’s trades, see Total Derivatives SDR, which now also includes information on broker/platform).
Looking ahead, all eye will be fixated on tomorrow morning’s April CPI release where Bloomberg consensus is looking for a headline print of +0.4% MoM/+5% YoY and a core of +0.3% Mom/+5.5% YoY. Meanwhile, the all-important NSA is expected to come in at 303.491 with the fixing in the trading screens having “backtracked a bit (in recent sessions) after jumping last week”, according to one dealer, with recent trades having been seen at 303.54 and the fixing closing out today at 303.53, according to one trader. “The data will likely show that inflation remains sticky, further dashing hopes of rate cuts later this year,” another source surmised.
Previewing the CPI data, strategists at Deutsche Bank highlight the following:
- ”…Our expectations of a +0.37% month-over-month gain for headline CPI (vs. +0.05% previously) and a +0.32% increase for core (vs. +0.38%) would have the year-over-year rate for the former stay roughly steady at 5.0%, while that for the latter would drop by 20bps to 5.4%. The near-term trends in core CPI inflation would also remain elevated, with the three- (4.7% vs. 5.1%) and six-month annualized (4.6% vs. 4.7%) rates still well above the Fed’s target.
“…At the component level, much of the softness in core goods has been a function of large declines in used cars and truck prices. While we do expect used cars and trucks to have added to inflation in April, methodological differences between the CPI and a wholesale index could mean that the recent rise in wholesale prices are not fully passed through into the CPI, especially with the more recent declines in wholesale prices.
“…As to services, while health insurance should continue to weigh on inflation, rents surprised by showing a sharper slowdown in March a little earlier than expected. While we expect rents to show similar gains as March, we would not be surprised to see them tick up a bit, as there still is a meaningful gap between the level of CPI rents and commonly cited measures of asking rents.
“…Regarding core services excluding rents and health care, much of the recent outsized strength in this key category is a function of travel-related services, namely airfares and lodging away. While we are expecting some payback in both in the April data, it is clear that the Fed's interest rate hikes have yet to impact the trend in this labor-sensitive category. Though the Fed indicated that they are likely done raising rates, continued strong inflation data, especially within the context of a robust labor market, could bring them back to the table for further hikes.”
Heading into the final stretch of today’s trade, the 2y breakeven is going out at 213.75bps (+0.875bps), 5y at 222.875bps (-0.75bps), 10y at 223.375bps (-0.5bps) and 30y at 223.875bps (-0.375bps).
Barclays: Eggflation has a great fall
Core inflation (and now Supercore) tends to be a focus of policymakers (and hence the broad investor universe), and energy inflation is a top factor in trading very near-term inflation prints, however strategist at Barclays note that “there generally tends to be less weight on food inflation.” The bank explains that “in part this is because of the long and variable relationship with leading indicators such as commodity futures, which contrasts with the relatively stable and quick pass-through from gasoline futures to motor fuel.” However, the bank cautions that “the CPI relative importance (weight) for Food and Beverages is 14.3%, and thus can be a quite important driver in the headline trend.” Barclays expounds below:
- ”…Last year, F&B CPI peaked at 10.9% y/y, so its contribution alone boosted headline by about 1.6 percentage points. The latest m/m reading was essentially flat, and leading indicators point to considerable weakness ahead. Global agriculture-related futures prices generally peaked mid-last year following Russia’s invasion of Ukraine, and after declining sharply in Q3 22, have recently shown signs of further deterioration. An index (SPCGAL Index on Bloomberg) which has a decent leading relationship with CPI food-at-home, is down 16% y/y; the historical relationship points to CPI food-at-home turning negative on a y/y basis by the end of this year. Similarly, the UN’s FAO food price index was down m/m 12 consecutive months through March (though data just released for April showed a 0.61% m/m gain). This index too points to negative y/y CPI food later this year.
“…While broad commodity futures indices have a long (and variable) lead into CPI food, a USDA index for egg prices tends to have a stronger and more contemporaneous relationship with the CPI for eggs. The index has continued to decline recently; it is down about 80% from its late December peak, and has fully erased gains starting in late 2021. If the historical relationship holds, we are likely to see sharply negative m/m CPI egg readings in (tomorrow’s) print and the one for May as well.”