Upside risks to inflation
November 9, 2021
–Yields rebounded yesterday on light volume and the curve flattened as the belly led the way. EDU’23 was the weakest contract on the euro$ strip closing down 10 at 9866.5. The five year yield rose 7.2 bps to 1.123% and tens gained 4.7 bps to 1.497% in front of today’s auction. Clarida said yesterday that he expected conditions to be in place by the end of next year for a rate lift-off, citing a rate of 3.8% as full employment. Jan’22/Jan’23 FF futures spread is 50.5, signifying market expectations of two hikes by end of 2022. Here’s a direct quote from Clarida on inflation:
“But let me be clear on two points. First, realized PCE inflation so far this year represents, to me, much more than a “moderate” overshoot of our 2 percent longer-run inflation objective, and I would not consider a repeat performance next year a policy success. Second, as always, there are risks to any outlook, and I and 12 of my colleagues believe that the risks to the outlook for inflation are to the upside.”
–Bloomberg reports that Biden interviewed Brainard for top job at the Fed. Vice-chair Quarles resigned yesterday, effective at the end of the year. Clarida took office as a Board member to fill an unexpired term ending Jan 21, 2022. Fed changes are in play.
–Today features PPI expected 8.6% with Core 6.8%, same as last month. CPI tomorrow. This, as the 10-year when-issued yield is hovering right around 1.5%. The WSJ has a headline noting that China junk-bond yields top 25% as property developers continue to struggle. It seems as if markets in China are responding to economic conditions while the US treasury market ignores inflation. The ten-year inflation indexed note yield was negative 113 bps late yesterday; not a record low but getting close.
–Option volume was light, but a representative trade of pressure on reds and greens was +20k 2EF 9825/9787.5ps for 5.0. Settled 5.25 vs underlying (green) EDH’24 9852.0. Midcurve Jan options expire January 14, 2022.
