Front end pounded
June 2, 2022
-Yields jumped yesterday led by fives up 13 bps to 2.94%. The curve flattened with thirties up only 2.4 bps to 3.077%. On the euro$ curve the red pack closed down 17, greens -14.125, blues -11.625 and golds -8.375. ISM Mfg was solid at 56.1, though the employment component at 49.5 was the lowest since late 2020. Bank of Canada raised by 50 bps and signaled more to come with warnings about inflation expectations becoming entrenched (obviously highlights same problems confronting US). Bullard again laid out a case for more aggressive action by the Fed through year-end. With a bit over a week to go for June midcurve option expiration (10-June) the expiring red, green and blue atm straddles are 21, 20.5 and 19. Focusing on the weakest contract on the strip, EDM3 settled 9657 and the 0EM 9662.5^ at 21.0. That futures price is consistent with FF target of 3.0 – 3.25%. Again, note that EDM3/EDZ3 spread is -20 (9657 vs 9677) so the payoff for aggressive tightening now will be a much slower economy featuring a bias toward lower rates by the end of next year.
–The Atlanta Fed GDP Now is projecting 1.3% for Q2 down appreciably from the May 27 forecast of 1.9%.
–July WTI is nearing $112/bbl after having almost reached 120 earlier in the week. News reports about Biden going to Saudi Arabia to grovel for more supply. Econ news today includes ADP expected 300k, Productivity and Unit Labor Costs (11.6%), Jobless Claims at 210k, Factory Orders and Durables. Head of the NY Fed desk Lori Logan to speak at 11:00. Employment report tomorrow.
