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BEs post solid gains to end the week
PPI came in touch higher (0.3% mom/0.8% yoy, ex-food/energy 0.3% mom/2.4% yoy) while University of Michigan inflation expectations in the survey were lower (1y at 3.3% vs 3.5% forecast, 5y-10y at 2.9% vs. 3% forecast). Nominal yields have seen a choppy trade settle into a belly-led selloff, with rates last 2.5 to 7bps higher on the day. Equities are last mixed (DJIA +0.26%, S&P -0.15% and Nasdaq -0.58%) while the energy sector is higher (WTI +0.64%, Brent +0.64% and NYH gasoline +2.15%)
TIPS breakevens have built on early upward momentum today to post solid gains across the curve, as RYs have outperformed nominals, especially in the front end and belly of the curve. Sources see the move in part as a continuation from post-CPI yesterday as some strong buying emerged for a spell before early exits.
Additionally, a source noted seeing better buying of the front end, saying “with the energy on the rise this past month and the OER holding pretty well,” some market participants could be adding to short term long, anticipating “a rebound in core,” the trader judged.
Elsewhere, in ZCs swaps today, 10y ZC swaps traded at 262.75bps on a total of $30m, according to the SDR.
Currently, the 2y breakeven is at 204.3bps (+5.5bps), 5y at 231.5bps (+4.1bps), 10y at 237.5bps (+2.8bps) and 30y at 232.9bps (+2.25bps).
Inflation trend may have not shifted down for good - Barclays
Analysts at Barclays see the latest CPI print showed “continued disinflation” but “albeit given the idiosyncratic drivers, risks are that it runs out of steam.”
As for the report, Barclays finds that “the July CPI report was broadly similar to the one from June. Core CPI rose 0.16% m/m (same as in June), making it two months in a row of soft inflation prints.” However, the bank finds that “the softness was again driven by pandemic-sensitive categories and is likely to reverse somewhat over the remainder of the year.” Further:
- “Core services ex-shelter picked up to 0.2% from 0.1% over the previous two months. It still remains soft but this is being driven by volatile categories such as airfares and continued drag from deflation in health insurance. Excluding these, core service inflation was up 0.55% vs. the previous two prints of 0.41% and 0.34%. The previous 3m and 6m averages were both 0.4%. Hence, just like in June, there was little progress in wage-sensitive sectors. Separately, recent data still show ongoing strong wage gains, the with Atlanta Fed wage tracker running at 5.7% y/y.
“As we look ahead, there is likely to be some pickup from these low levels of m/m core CPI. Airfares are unlikely to keep falling at the same pace (they are back to the pre-COVID trend). Used cars deflation may continue but is unlikely to accelerate. While wholesale vehicle prices are still falling rapidly, retail prices are softening at a lower rate. The drag from health insurance should also fade from October onward. In all, these suggest that the pandemic sensitive drag should begin to dissipate, especially as the economy stays resilient.”
As a result, Barclays would not be surprised if the trajectory of core CPI inflation “starts to worsen.” In addition, it believes that “the recent increase in oil prices will feed through into headline CPI” and thus year over year headline CPI is “likely to rise over the coming months after troughing at 3% in June” which is also “likely to push up short-term consumer inflation expectations, which have fallen sharply.” Overall, Barclays does “not conclude from the last two reports that the inflation trend has shifted down for good.”