Let the long end do the tightening work
August 12, 2022
–Bloomberg reports that Mary Daly favors a 50 bp hike in September. I might be incorrect, but I think she directly channels Powell’s sentiments.
–Large steepening trade over the past two sessions, even as inflation data were lower than expected. Yesterday PPI was 9.8% yoy vs 10.4 expected, with Core 7.6 vs 7.7. Changes from Tuesday (at futures settle) to yesterday: 2yr 3.28 to 3.225. 30y 3.00 to 3.16. A move of over 21 bps in two days as the bond contract has seen nothing but offers. The market trades as if the Fed is planning to slow the pace of hikes due to mark-downs in growth estimates, while inflation remains stubborn with a slightly decreasing bias.
–New recent high in EDU2/EDU3 calendar at positive 19 (9663.5/9644.5). Previous 20-session range -27.5 to +13. All one year calendars behind are negative. EDZ2/EDZ2 is negative 56.5 (9609.0/9664.5). It’s a stark difference between expectations for the end of this year, where EDU2/EDZ2 is 54.5 as the Fed continues its hiking campaign, while EDU3/EDZ3 is negative 20, when the weight of this year’s front-loaded tightening will buckle the knees of economic prospects.
–News today includes U of Mich Inflation expectations, expected 5.1% for 1-year and 2.8% for 5-10yr. The ten year treasury to tip breakeven has comfortably settled in around 2.5% over the past month.
