USD Swaps: Soft start to week; New words needed

Quiet start to week; New alternative for ‘pause’ required

Preparations for what Bloomberg this morning describes as an expected ‘hawkish skip' on Wednesday seems to involve many grim-sounding headlines about hidden inflation risks and hikes down the road as salespeople and strategists try to fill the void created by the Fed blackout period.

And of course the void is deepened by just a general absence of new news so far this Monday morning. What legitimate headlines there are so far today highlight a cull amongst Credit Suisse’s former top brass by their new UBS overlords, bad news for those departing but hardly surprising,  the not massively-lamented demise of former Italy PM Berlusconi, and some positive steps for Ukraine in its war with Russia,

But all-in-all today feels like a very summery Monday despite the approach of $40bn 3y and $32bn 10y auctions. While there is much talk of the June FOMC decision being on a ‘knife-edge’ etc, at least until CPI is out of the way tomorrow, if the Fed does do anything apart from nothing on Wednesday then it surely will need to think long and hard about its approach to messaging.

In other markets equities are quietly ignoring doomy macro headlines to push about 0.5% in Nasdaq futures with the S&P lagging slightly. One of last week’s hot topics was oil post-OPEC but WTI is $1.6 lower today and testing $68 today.

So… at lunchtime in London the 10y UST yield is unch at 3.74% underperforming a gentle rally in EGBs, with the exception of Basketcase Britain of course, where 10y gilt yields are up 3bps. On the UST curve, light volatility is the theme, as after a 2s/10s bear-flattening for much of the morning, it is now 0.5bps steeper as 2y USTs recover to be down 2bps from Friday, while in 10s/30s a slight long-end rally has flattened the curve by a bp to 13.5bps.  Swap spreads are lower across the board with 2y -1.5bps at -11.00bps, 5y was -0.50bps at -23.0bps, 10y was -0.75bps at -27.25bps and the 30y was -0.5bps at -68.25bps.   

Looking to the rest of the week and one thing is clear. The trendy word for strategists looking to capture the monetary policy zeitgeist is ‘skip.’ In a piece titled ‘A skip is not a pause,’ BofA strategists  make clear that a possible lack of activity by the FOMC this week will just be a blip, sorry skip, before more hikes down the road.  Barclays strategists make the very same point in the next section.

Barclays: FOMC will skip, not stop

The quiet start to the week so far, only intensifies the interest in the outcome of Wednesday’s FOMC meeting, which once upon a time was expected to mark the end of the Fed’s long hike. Not anymore, say strategists at Barclays, who argue that while the FOMC may skip a hike this time round, they won’t stop. Not yet.

Barclays says that “In our view, the stronger-than-anticipated data reveal that monetary policy is not as restrictive as we and many FOMC participants had been expecting. In our view, this warrants two additional 25bp hikes, in line with the change to our Fed call on May 31. However, we lack strong conviction about the timing, in part because of mixed messages from communications.”

The strongest argument against a hike, in Barclays’ view, “is rooted not so much in data and fundamentals but risk management. As noted at the onset, this has a few dimensions. The first is to manage risks of overtightening, given the magnitude of hikes already in place and the long and variable lags of policy transmission. At this juncture, we are close to the lag at which policy has tended to bite on aggregate demand, but things may be playing out more slowing than usual.”

“Second, even though the minutes suggest that at least a few on the committee perceive only modest effects from banking turmoil, there is a case for pausing to ensure that the risk of a sharp credit contraction will not materialize. Although these downside risks have seemingly faded, this does not completely undermine the risk management rationale for waiting as uncertainty is resolved.”

“Finally, with markets having entered into the blackout period having inferred – rightly or wrongly – a skip signal from Fed communications, there may be some cost to surprising markets in terms of credibility. They have priced in only a small fraction of a hike (8bp) in June, and exceeding these expectations would risk a wild market reaction, not to mention heavy criticism.”

Still, even Barclays hedge their bets slightly ahead of the inflation data, concluding that "the outcome is a very close call. But weighing these considerations, barring a strong CPI print (0.5% m/m or a firm 0.4% m/m) we expect the Fed to “skip” the June meeting and signal a likely increase in July."

So, with the Spring talk of regional bank contagion feeling like a distant nightmare that the world long since awaken from, perhaps the strongest argument for a pause in hiking activity is that very human factor… fear of a loss of face.

New issues: HSBC, Intesa Sanpaolo  

• HSBC is close to pricing a USD 11y N10 Sub Tier II note at USTs +310bps. Self-led.

   

• Intesa Sanpaolo plans USD 10y preferred (Baa1/BBB) and USD 31y NC10 (fixed to fixed) non-preferred (Baa3/BBB-) bonds via Barclays, BofA, Gs, HSBC, Intesa, JPM, MS and TD.