Deflating…except for gold
December 22, 2023
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–Today features PCE deflator, expected 0.0 m/m and 2.8 yoy from 3.0% last. Core expected 3.3 from 3.5. Attention now seems to have shifted to 6-month annualized growth rates in order to illuminate recent improvements in the flight path to target. However, Core Service prices are still sticky and likely require higher levels of unemployment to decelerate. On the other hand, I was pleasantly surprised to fill the gas tank at sub-$3/gallon yesterday. In the first half of December, WTI got below $70/bbl, but this morning CLG4 is $74.50 (up 0.60). Gold currently +16 at 2067.30, a modest effort at an upside breakout (which is about to turn into a full-blown explosion!)
–Curve steepened a bit yesterday as stocks took back some of Wednesday’s sell-off. SFRM4 and SFRM5 both up 3 at 9547.5 and 9673, while M6 was only +1 at 9683 and M7 down 0.5 at 9675. Again, note that every contract from June’25 back is about the same price…around 3.2% yield. On the treasury curve 2s were down 2 bps at 4.347% and 10s rose 2 bps to 3.894%. 2s, 5s and 7s auctioned next week. Stocks a bit weaker this morning, perhaps in sympathy with China as stocks there were hit due to restrictions on gaming. (rather than playing video games, why don’t you all start speculating in stocks…)
–Continued exit of SOFR call spreads. Yesterday about 50k SFRU4 9700/9800cs sold; settled 9.25 ref 9588.0. SFRH4/M4 3-month calendar posted a new low at -48 (9499.5/9547.5) and H4/H5 one-year spread hit a new recent low of -153.5. The front 3m spread, March/June at -48, is more inverted than the front spread had gotten in the aftermath of the regional banking crisis (April into May). However, at that time the second spread had settled as low as -50 and the third at -56. Interestingly, June/Sept (SFRM4/U4) is currently -40.5 and Sept/Dec -36.5. Relative to the hiking pattern that got increasingly more aggressive, the easing path is perhaps perceived as steadier over time. I’m not even sure if that’s a correct interpretation…however, it used to be that rates were slashed in downturns and raised more gradually. This easing cycle could look more like the hiking campaign of 2004 to 2006, i.e 25 bps at a time, at every meeting. As Argentina’s Milei said yesterday in reference to failed socialist policies, “…the problem is not the chef, but the recipe.” Time for a modicum of caution as the recipe may undergo multiple changes in 2024.
–Peace and goodwill towards your fellow man. Merry Christmas!
