USDi: BEs mixed yet contained; Inflation basis stabilizes

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BEs mixed yet contained; Inflation basis stabilizes

With no major data releases or Fed speakers (due to Blackout) ahead of next Tuesday’s CPI release and Wednesday’s FOMC announcement, today marked a rather mundane trade in the screens with nominals flattening a tad with yields up to 3bps lower in the back end to 4bps higher in the front-end while the major domestic equity indices ran in place for much of the session (Dow +0.03%, S&P +0.24%, Nasdaq +0.36%).

Meanwhile, in the oil trading pits, much of the headline risk took place yesterday as the markets digested OPEC+’s announcement of unilateral production cuts that helped propel oil priced even higher yesterday after a bullish run-up at the end of last week.  However, yesterday’s gains were largely given back as the announcement impact dissipated (Brent -0.80%, WTI -0.81%).  And against this backdrop, TIPS breakevens and inflation swaps ended the session mixed but little changed (~ +/-1bps) in a relatively contained trade intraday. 

Flow-wise in derivatives-space, inflation swap trades on the SDR today included 2y ZC swaps at 240.125bps, 3y ZC swaps at 241.75bps,4y ZC swaps at 243.25bps,  5y ZC swaps at 246.125bps, 245.875bps and 246.375bps, 6y ZC swaps at 248.25bps, 10y ZC swaps at 251bps and 250.5bps, 20y ZC swaps at 246bps, and 30y ZC swaps at 244bps and 243.875bps (for all of today’s trades, see Total Derivatives SDR, which now also includes information on broker/platform).

Notably, in derivatives-space, one dealer noted that “basis levels stabilized after leaping higher last week, with recent zero-coupon interest seemingly on pause for now.” 

Heading into the final moments of today’s trade, the 2y breakeven is going out at 214bps (+0.75bps), 5y at 217.25bps (-1bps), 10y at 220.875bps (-0.75bps) and 30y at 223.875bps (+0.125bps).

Deutsche Bank: Trend inflation doesn't skip a beat

Recent inflation data saw core PCE prices increased by 38bps in April, as price pressures increased a bit and remain elevated.  Digging down into the finer details, strategists at Deutsche Bank highlight that “within the major components, inflationary pressures were mostly concentrated in services categories which added 34bps to the core inflation rate. The strength in core services inflation was primarily driven by housing and utilities (+0.32% in month-over-month terms), financial services and insurance (+1.1%) as well as healthcare (+0.49%).” 

With these data, Deutsche Bank has updated its trend inflation dashboard, which replicates a variety of measures from the Fed staff's past work, and the banks finds that “monthly median and mean estimate stayed flat at 3.3% and 3.4% – both still well above the Fed's 2% target.”  Deutsche Bank elaborates below:

”…Within the individual measures, trimmed mean PCE inflation rose further, with the year-over-year rate increasing 11bps up to 4.8% and reaching a new high since 1980s. Similarly, the FRB Cleveland Median PCE inflation gauge remained strong and posted a 5.8% year-over-year gain, consistent with inflation rates last seen in 1980. The rest of our individual measures saw little change from March, except for one. The increase in inflation expectations from the University of Michigan survey pushed the Phillips curve metric up by 10bps to 3.5%.

 

“…Broad-based and persistent inflation pressures are the key reasons some Fed officials favor continuing the hiking campaign rather than committing to a pause . As Fed officials have highlighted in the past, there are concerns that an extended period of high inflation might unanchor inflation expectation and make their work harder. Indeed, our analysis suggested that market measures of long-run inflation expectations have been on the rise recently, especially relative to fundamental drivers like oil prices. At the moment, our baseline is that the Fed remains on hold at the June meeting, but there are clear risks of at least one more hike over the next two meetings.”