USD Swaps: PMIs set the tone at start of big week; FOMC views

PMIs set the tone at calm start to big week

Weaker-than-forecast UK and Eurozone PMI data spelt bad news for the economies of those two areas but good news at least for bond bulls. Ten-year gilt and Bund yields fell 8bps and 6.5bps respectively, helping to drag slightly calmer 10y UST yields 4bps lower ahead of the the US's own PMI data later today as well as the last big week for central banks until Autumn.

The voters at both the Fed (on Wednesday) and the ECB (on Thursday) are expected to hike 25bps before hitting the beach while borrowers in both regions are left to sweat it out.

In USTs the prospect of these fresh hikes is probably behind a slight 2s10s curve-flattening as the 2y yield is currently just 1bp lower at 4.82% while the 10y is 3.79% and 30y is -3bps at 3.86%, although some strategists do think there may be scope for 2s/10s steepening later in the week if Fed officials choose to highlight the below-expectations US CPI headline last week.

Hardly dramatic stuff but here credit must go to Fed messaging which has been clear enough to prompt a rare unity of views among banks (see next section) regarding the near-certainty of a 25bps hike. Of course this means that any outcome other than a 25bps hike would create particularly big waves but that just doesn’t feel likely this time round.

New issuance is unsurprisingly on the quiet side today and equity markets are lightly mixed with European stocks 0.5% lower by lunchtime in London, while S&P futures are +0.2% higher in very limited moves in risky assets so far.

And looking at dollar swap spreads, the 2y is currently -0.75bp at -11.5bps, 5y is -0.125bps at -21.25bps, 10y is -0.125bps at -25.75bps and 30y is -0.25bps at -65.25bps.

Strategists in rare agreement for July FOMC, if not Sep

Strategists at four banks from both sides of the Atlantic share the same view for this week’s FOMC meeting. Anyone craving rate policy nuance will seemingly just have to wait until September.  

• Barclays: “We expect the FOMC to deliver a 25bp hike in July, and another 25bp hike in either September or November. While our baseline has so far been for Sep, we now think a Nov hike has become more likely, with the June inflation data providing the FOMC more time to assess the effect of its past rate hikes. We then expect the FOMC to remain on hold through mid-2024. The downside surprise in June inflation reduces the urgency for another 25bp hike after July. However, with activity resilient and the labor market remaining tight, we expect the FOMC to remain skeptical that inflation will remain on a downward trajectory toward its 2% target without another rate hike”

   

• Citi: "The FOMC (this) week seems perfunctory (ie 25bps hike), because the Fed had already pre-committed to a rate hike this month at the last FOMC meeting. So much for data dependency. We expect an acknowledgement of the weaker CPI and some verbal gymnastics to mildly recant the two rate hikes guided to in the last FOMC. All else equal, this would suggest a short-term bull steepening and a weaker dollar."

   

• Deutsche: "The Fed and the ECB are likely to deliver the 25bp hike priced by the market; but the focus will be on the guidance for the Sep meeting. The Fed’s latest dot plot guidance is consistent with one additional hike this year after July. However, real rates are likely to be restrictive enough and the Fed is likely to revise its inflation forecast lower in Sep. This should be enough to contain the pricing of rate hikes and leave the door open to gradual rate cuts, if only to keep real policy rates constant"

   

• NatWest: “With a 25bps rate hike now fully priced into the market, there is virtually no reason for the FOMC not to deliver on Wednesday. We suspect the information from the meeting (e.g., policy statement and Powell’s presser) will continue to suggest widespread agreement about the need for possible further tightening at some point later this year. In fact, nothing in the policy statement or from Powell is likely to discourage the market from pricing in at least some chance of a twelfth rate hike later this year.”

New issues

• KEPCO is expected to price a 3y Sustainable USD bond at USTs +100bps via BofA, Citi, JPM, Mizuho and UBS later today.