Canada hikes, China paving the way for a cut
June 8, 2023
–Bank of Canada raised rates yesterday to 4.75% from 4.5%, but today China’s six state-owned banks cut deposit rates…reducing the rate for 5-yr time deposits to 2.5% from 2.65%. (CNBC). According to Nomura, “This new round of deposit rate cuts, as well as rapidly worsening exports, broadening property distress, ongoing disinflation and a likely Fed pause, raise our conviction of this call on rate cuts” (looking for PBOC to cut 10 bps).
–The Canada move spilled into US rates, but it was nearly a parallel shift higher: red sofr pack -7.125 bps while the ten year treasury rose 8.3 bps to 3.78%. Weakness in USU3 continues this morning with last of 126-04 vs settle 126-16. Low of the move on May 26 was 125-09.
–New buyer yesterday of 15k TYU 110p for 32 covered 113-05, settled 31 vs 113-07. On the SOFR side a buyer of about 45k SFRZ3 9600/9700cs for 10 to 10.5, settled 10 vs 9501.5. SFRZ3 traded a low of 9495.5 yesterday. In a way, it’s to the Fed’s credit that this contract has converged with the Fed’s end-of-year FF projection of 5.1%. A month ago the contract was 9575 or 4.25%. It has been a fairly consistent message from Fed officials that rate cuts are not likely this year; the Fed’s guidance has, for once, worked. The end-of-year 2024 FF projection in March was 4.3% while SFRZ4 settled 9649.5 or 3.505%. Large gap there. SFRZ3/Z4 settled -148 and is now the most inverted one-yr calendar on the strip.
