USDi: Soggy data jolts nominals higher, but TIPS not too far behind

• Soggy data jolts nominals higher, but TIPS not too far behind

• Barclays: Health insurance CPI - Primed for a rebound under the new methodology

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Soggy data jolts nominals higher, but TIPS not too far behind

Soggier than expected JOLTS jobs openings (8,827k versus 9,500k Bloomberg consensus along with a 417-point downward revision to the prior month) and Conference Board consumer confidence data (106.1 versus 116 Bloomberg consensus and a 3-point downward revision to the prior month) sent nominal yields tumbling down the rabbit’s hole today in bull-steepening fashion (~ 5-12bps after an added assist from a solid nominal 7y auction this afternoon).

And against this torrid (...and illiquid) duration rally, it was a little tough for TIPS to keep up despite the tailwinds of a buoyant risk tone (Dow +0.85%, S&P +1.45%, Nasdaq +1.74%) and higher oil prices (Brent +1.26%, WTI +1.37%).  Thus, with the dust settling on today’s trade, dealers are marking breakevens a little lower (~ 1-2bps) in the 2y-30y sector.

“Real yields did their best to keep pace with the nominal rally but demand for TIPS wasn't quite enough, and breakevens again finished the day down 1-2bps across the longer maturities,” one dealer explained.  “The front-end finally came under relative pressure with even the old 5y getting hit down late in the session after being perma-bid the last few weeks,” he continued.

Flow-wise in derivatives-space, swap trades on the SDR today included 1y ZC swaps at 238.5bps, 2y ZC swaps at 241.875bps, 3y ZC swaps at 243.75bps, 4y ZC swaps at 246.625bps and 247.375bps, 5y ZC swaps at 251.375bps, and 251bps, and 10y ZC swaps at 256.75bps (for all of today’s trades, see Total Derivatives SDR, which now also includes information on broker/platform).

In the last hour of trade, the 2y breakeven in the screens is trading at 199.25bps (-2.25bps), 5y at 221.5bps (-2.25bps), 10y at 228.625bps (-1.75bpsd) and 30y at 228.75bps (-1.75bps).

Barclays: Health insurance CPI - Primed for a rebound under the new methodology

Under the new CPI health insurance methodology, strategists at Barclays continue to expect this category to rebound in the October 2023 print, although they have slightly less conviction on the magnitude of increase given changes to the BLS estimation process. Barclays continues to forecast a +1.1% m/m run-rate, but only applicable through March 2024.  The bank highlights the following:

”…The BLS will estimate health insurance using a new methodology starting with the October 2023 data (which will be released in November). Under this method, the retained earnings data from the health insurance industry will be smoothed over two years, to temper the annual ‘swings’ in the index. In addition, the calculations will incorporate source data from semiannual financial reports from the industry, to reduce the lag in the index.

 

“…This change will be implemented in two main phases. Beginning with the October 2023 CPI print, the index will be estimated using the new smoothing methodology but will remain based on the annual 2022 NAIC reports, as before. These new estimates will be spread over only six months till March 2024. Starting with the April 2024 data (to be released in May 2024), the BLS will switch to using the semiannual reports in addition to the annual data and will apply these estimates through September 2024, using a new formula.

 

“…Applying the new methodology, we continue to estimate a rebound in healthcare CPI in October 2023, of ~1.1% m/m, in line with our prior estimate based on the old methodology. Our expectation of a rebound stems from two factors: First, since the same annual NAIC 2022 reports will be used as source data; the increase in the 2022 retained earnings-to-benefits ratio will continue to serve as the basis for the October 2023 health insurance calculation. Second, by our calculation, the application of a proposed ‘adjustment’ factor outlined in the BLS appendix is likely to help prevent a significant distortion from the switch to the new methodology. That said, we see more uncertainty about the magnitude of increase, given some new nuances to the estimation process.


“…However, this estimated 1.1% m/m run-rate is now likely to apply only till March 2024, and from April 2024 to September 2024, it is hard to ascertain how the data are likely to evolve as new information from the 2023 NAIC semiannual financial report (to be released early next year) will be incorporated.

 

“…On balance, this new methodology does not materially alter our CPI inflation outlook. Should the rebound come in line with our estimates, in the October CPI print, we expect to see about a +4.4bp increase in m/m core inflation, from the swing in health insurance inflation alone. For core services, this would imply a boost of +5.1bp, and for ‘supercore’ CPI, it would be about 10bp. In the following months till March 2024 CPI, we expect CPI health insurance will boost core inflation by about 0.9bp/m.

 

“…We think the Federal Reserve will continue to look past these shifts in health insurance CPI, as these estimates do not factor into the construction of the PCE price index, the Fed's preferred inflation gauge. That measure estimates the price index of medical care services using source data from the PPI and is much more comprehensive than the retained earnings concept used in the CPI.”