Expected vs Actual Inflation in the time of mostly peaceful protests
September 1, 2020
–Yields fell yesterday with tens down 3.3 bps to 69.3, but the largest move was in the ten year inflation-indexed note, which dropped 6.3 bps to a new low of NEGATIVE 1.112%. The dollar index fell and hit a new low this morning at 91.75. The breakeven tip/treasury spread reached a new high for the year of 180.5 bps, just eclipsing the level at which the year started. Somewhat interesting with respect to Clarida’s speech yesterday, in which he said, “With regard to inflation expectations, there is broad agreement among academics and policymakers that achieving price stability on a sustainable basis requires that inflation expectations be well anchored at the rate of inflation consistent with the price-stability goal. This is especially true in the world that prevails today, with flat Phillips curves in which the primary determinant of actual inflation is expected inflation.” In my opinion, the needle is moving on expected inflation, likely due to a combination of fiscal and monetary policy.
–Implied vol eased along the curve as prices rallied. However, there was another 20k clip bought in 3EM 9925/9875ps for 7.5 vs 9950.5 in EDM’24; settled 7.25 vs 9953. Also new buying of EDZ0 9962/9950ps for 0.75, which led to an open interest increase in the top strike of 40k, settled 1.25 vs 9971.5. In conjunction with the blue June put spreads, consider these levels: In late 2012, the EFFR was around 16 bps as opposed to 9 now, the first ED quarterly was around 9970 vs EDZ’20 at 9971.5 now, but the 16th ED contract, currently EDM’24, was around 9850, and this was prior to 2013’s taper tantrum. Of course, at that time the tip b/e was around 250 bps…
–Today we get Brainard’s take on the new Fed framework. Also ISM Mfg, expected 54.8 from 54.2, with Prices Paid 54 from 53.2. The highest Prices index since 2019 is 54.3.
