Conflict escalates, curve steepens
January 12, 2024
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–Solutions are becoming painfully obvious. China CPI was -0.3 in December from a year earlier. All you need is a dysfunctional government that dominates economic activity, crushing debt, and a property bust (CRE). Fold in equity market weakness. The US is on the right path to quell inflation…just need the equity market to buckle.
–CPI in the US was a bit higher than expected, yoy 3.4%. Rate futures sold off post-data, but late buying materialized by those with knowledge of the Houthi bombing plans, and futures closed at the highs. Strongest SOFR contracts were Dec’24 and March’25, both up 14.5 to 9622.5 and 9651.0. As an example of the volatility, SFRZ4 was 9613.5 pre-CPI, traded down to 9605.5, and then soared late in the day to 9624.5. As the US and UK are drawn deeper into the chaos of the mideast, there’s a flight to the safety of shorter maturities. The two-year was down over 10 bps at futures settlement, to 4.26%. Tens fell 5 bps to 3.977%. This morning CLG4 is near $75/bbl, up around $3, and Feb Gold is 2050/oz, up over $30. It’s not clear to me that global military conflict hastens the need to ease monetary policy, but the move toward safety is dominant. FFJ4 settled 9486 or 5.14%, vs what would be 5.08% in EFFR on a 25 bp cut. So, the market is about 75% certain of a 25 bp cut. Taiwan election is this weekend.
–News today includes PPI expected 0.1 with yoy 1.3% from 0.9% last.
–The curve steepened as shown on attached chart. 5/30 made a new high for January at +29, and has taken out highs from October.
–High of last year in 2/10 is -16, set on Oct 31. Subsequent low was -53.6 on Dec 15. We’re now at the highest levels since early Nov at -28.3.
The pattern is a bit different on 5/30. The high was set early in the year on May 10 at 40.8. The Oct high corresponding to the year’s high in 2/10 was 27.4. Yesterday (12-Jan) we exceeded that high at 28.9.
