Inflation decelerating? Not so fast
February 15, 2023
–CPI yoy was 6.4%, down 0.1 but higher than expected 6.2. However, the NY Fed’s Underlying Inflation Gauge, also out yesterday, was 5.1% for both the ‘full data set’ and ‘prices-only’ and both were down 0.3% from the previous month. In any case, the confidence for rapidly declining inflation was shaken and short term rates again jumped. Weakest contract on the SOFR strip was June’24, settling down 20.5 at 9584.5. On Feb 1, just ten trading days ago, it settled 9665.0, a drop of 80.5 bps! Not surprisingly, near calendar spreads are making new highs. For example, M3/M4 settle -112 (9472.5/9584.5); low settle this month was -155 on Feb 2. SFRM3/Z3 settled -24, having been below -50 a few weeks ago. The pivot is moving back. Retail Sales today expected +1.8% with Industrial Production -0.7.
–Longer end of curve flattened to new lows with 2 and 5 year notes bearing the brunt of selling. 2/10 was -86 with 2s up 8.8 bps to 4.62% and 10s up 4.4 bps to 3.761%. 5/30 also at a new low of -20.
–FFJ3 settled 9515.5 or 4.845%, a hike of 25 at the March FOMC should make EFFR 4.83. FFN3 settled 9477.5 a spread of 38 to April. There are 2 FOMC meetings in between, May 3 and June 14. There is also meeting July 26, worth about 16% of the July contract.
–A couple of relatively hawkish comments in a speech from Lorie Logan, now head of the Dallas Fed:
“In moving forward with monetary policy, we need to manage two risks.
The most important risk I see is that if we tighten too little, the economy will remain overheated and we will fail to keep inflation in check. That could trigger a self-fulfilling spiral of unanchored inflation expectations that would be very costly to stop.
A key lesson I took away was that when central banks aren’t sufficiently proactive in addressing high inflation, the road back to price stability is longer, the labor market is weaker, and the scars on the economy can last long after inflation is finally reduced. We must stay focused on bringing inflation back to target in a sustainable and timely way.”
–Large buyer of 23k ESH 3950 puts yesterday for about 31 points Settled 28 vs 4145.50. Cem Karsan on twitter pointed to Carl Icahn. Another twitter tidbit from a week or so ago pegged today, Feb 15, as a likely crash date using chatgpt.
https://www.newyorkfed.org/research/policy/underlying-inflation-gauge
https://www.dallasfed.org/news/speeches/logan/2023/lkl230214
