USD Swaps: USTs steady pre-CPI as SONIA ignored

• Market a touch above consensus for CPI

• Callables and Formosas

Market a touch above consensus for CPI

With all eyes fixed on the CPI, Treasuries simply shrugged off the big bear-flattening seen in gilts today following strong UK wages data, deciding to take their lead from the generally calm Bund market instead (see Total Derivatives).  UST yields are edging into the green with the 5y at 3.88% (-1bp) before the data, while SOFR futures are +1-2 ticks in the reds and greens – versus losses of as much as 28 ticks in red SONIAs – and Nasdaq futures are +0.3%. TIPS breakevens are equally steady with a $1.2 recovery in WTI to back above $68 providing some support from the front end following yesterday’s $3 plunge.

Meanwhile the NSA CPI fix traded last at 304.16 yesterday which was “stable but above the broader economists' forecasts,” according to one dealer and the SDR shows the fix trading last at 4.05206% yesterday in $100m.  The Bloomberg survey is at 304.075 for NSA CPI and 0.4%/5.2% for core versus a 0.4%/5.5% print last month. BNP Paribas previews the data:

“Expect the May CPI report to show modest improvement from April…Base effects will likely have a material impact on the year-on-year rate, with headline CPI falling nearly a percentage point to 4.0% and core CPI falling to 5.2%.

 

“We look for CPI excluding rent, OER, and health insurance to decline in year-on-year terms to 5.4% from 5.8% prior. However, a turn in categories associated with ‘revenge spending’ (such as airfares, hotels, event admissions, and car rentals) drove most of last month's improvement and could do the same in May. If this is the case, it would send less signal of an underlying wage-driven impulse at play.

  

“Beyond May, we expect core inflation to moderate appreciably as used vehicle and shelter cost inflation subside. However, we think a more material weakening in the labor market will be required to return non-housing services inflation – and inflation more broadly – all the way back to target-consistent rates. Our 2024 Q4/Q4 headline CPI forecast of 2.2% is conditioned on the recession that we envisage beginning in H2 2023 and extending into Q1 2024.

 

“While we expect the Fed to maintain fed funds unchanged in June, we believe Chair Powell will rebrand it as a 'skip', with a firm commitment to re-engage in July to appease the Fed hawks. However, given the expected relief in CPI, the inflation-adjusted fed funds rate will continue to rise. By September, we expect weakening activity and employment data to lead toward a more enduring pause, with the Fed holding at 5.5% until its first rate cut in March 2024.”

With issuance on hold for the data swap spreads are little-changed at -10.50bps (-0.125) in 2y, -22.25bps (+0.25) in 5y, -27.50bps in 10y and -68.75bps (+0.125) in 30y with outright SOFR volumes above-average out to 7y and a $18bn 30y auction to follow the inflation data.

Callables and Formosas

• IBRD sold a $100m 10y NC1 fixed callable (non-Formosa).The note matures Jun 2033, is callable annually from Jun 2024 and pays a 5.75% coupon. Lead is WFS and announced Jun 12.