March 12. Auctions and inflation this week.
–Three and ten year notes auctioned today. CPI tomorrow, followed by the thirty year bond auction. Auctions are more important than usual as the market tries to gauge global demand in the face of increased supply.
–NFP of 313k Friday was coupled with a yoy increase of only 2.6% in Average Hourly Earnings, with the previous number revised lower to 2.8 from 2.9. Yields ended modestly higher, with tens +2.8 bps to 289.2. On the euro$ strip, greens were weakest on the board, closing -3.375. Good buying Friday of EDZ8/EDZ9 at 37.0; settled +2 at 36.5. EDZ9 has the most open interest of any contract at 2.175m, having doubled since the beginning of the year. While near calendar spreads rose, the back end of the curve remains flat. For example, greens to blues (3rd to 4th year spreads) settled at a new low of just 5.375 bps. Lack of inflationary pressures (as reflected in subdued wage growth) is helping to keep the back end compressed. At the same time, growth is continuing, with the Atlanta Fed GDP Now at 2.5% for Q1 and the NY Fed at 2.83%. This recipe of moderate growth and low inflation diminishes risks of a more aggressive Fed in the future, and supports equities. In the short term, next week’s FOMC meeting is fully priced for a hike, and June is 75% of the way there, with July FF at 9814.5 (9808.5 represents 100%), and FFK/FFN settled 18.5. Nasdaq soared to a new high on Friday.
–BIS says Canada and China at risk of banking problems, but China has been taking steps to deleverage.
–March euro$ midcurve expire Friday. Auctions and inflation data out this week. 0EH9 9737.5^ settled 6.0, 2EH0 9712.5^ 8.5, 3EH1 9700^ 8.0 and 4EH2 9700^ 7.5.
