USD Swaps: Big day for market’s new main driver

Big day for market’s new main driver

Once a month NFP is produced and sometimes it really is the big beast of the US market-moving data world, and sometimes it isn’t. Over the last year or so inflation has had a shot at NFP’s throne, but those days are over according to one USD swapper today.

“One way to look at today is that the inflation problem in the US is now clearly fading, but it is the incredibly resilient labor market that gives the impression that the Feds will never stop hiking. Not until that changes.”

He continued to say that, “Any chance of a December rate cut is being priced out of the market and with May CPI coming in below expectations and June forecast at about 3% (3.1% average forecast for the CPI release on Wednesday of next week) it was very telling that the market couldn’t rally in the last CPI headline and can’t rally now.”

Because, he said, “The labor market is driving everything. It’s proved unbelievably resilient and keeps surprising everybody… One reason is all the money that people saved during the pandemic and still have in the bank. There’s still a lot of scope for corporations to increase margins because people can afford it, so there is also a lot of scope to hire.”

The trader said that yesterday’s very strong ADP employment data means that the market is braced for another overshoot – although it is a given that NFP data long exercised its right to surprise at will – and he said that while the front-end may have priced that in, the prospect of a long, long wait for labor market tightness is a sag that will weigh across the curve for a while.

Unless NFP exercises its right to shock with an incredibly weak headline today…

As for flow so far, sources say it has been limited to, “Tidying up flows, particularly from investors in Asia earlier this morning who were buying the front-end and belly of USTs. But otherwise it's pretty quiet.”

Currently USTs are underperforming European fixed income markets, especially gilts which has gone off on a typically idiosyncratic rally. Across the curve the benchmark 2y UST is currently +2.7bps at 5.007%, 5y is +4.5bps at 4.39%, 10y is +3bps at 4.06% and 30y is +0.8bps at 4.007%. In swap spreads the 2y ASW is +1bp at -7.25bps, 5y is +0.5bps at -21.5bps, 10y is +0.25bps at -24.875bps and the 30y is +0.25bps at -66.25bps.

BNPP: Hawks set for a boost today; Deutsche eyes 25bps

ADP employment data for June came in yesterday at 497K versus a forecast 225K and, strategists at BNPP note this morning, as a result “US, rates sold off, pushing UST 10y closer to pre-regional bank crisis levels, with UST 10y at 4.03%.”

Looking to the imminent non-farm payrolls data (Bloomberg’s average forecast is +230K in June versus +339K in May) BNPP strategists said “we project nonfarm payrolls at 230k and a partial reversal in the unemployment rate to 3.6% (3.7% prior).”

It reckons that “private payrolls should deserve closer attention than the headline, as the public sector reading could be prone to distortions amid seasonal end-of-school year education sector employee layoffs. A significant upward surprise on payrolls, coming on the back of better-than-expected ADP and ISM Services data, would embolden the hawks on the FOMC to push for more policy tightening, in our view.  ink. The policy implications that follow are very much ‘higher for longer’, in our view.”​

Meanwhile, basing its view on scrutiny of Fed officials’ comments since the June FOMC meeting, Deutsche today offered a succinct, downbeat and consensus conclusion regarding this month’s FOMC meeting. “%. Overall, it appears that a 25bps hike in July is almost a sealed deal, consistent with our baseline expectation.”

New issues:

• Hanwa Q CELLS Americas Holdings Corp, the US branch of the Korean photovoltaic cells,  has mandated BofA, Citi, CA, and HDB to arrange global investor meetings ahead of a planned 5y 144A USD Green Bond with a guarantee from KEXIM.

   

• SMFG last night priced a $4.3bn 6-part ($850m 3y fixed, $400m 3y FRN, $750m 5y, $650m 7y, $650m 10y and $bn 20y). Leads SMBC Nikko, GS, Jeffries, JPM and Citi.  A1/A-/A-. +120bps, SOFR +130bps, +145bps, +165bps, +175bps, +195bps.