Comforting signals, for now
July 13, 2023
–CPI headline was 3.0 yoy (expected 3.1) and Core just 4.8%. Both at lows for this calendar year with headline at the lowest since April of last year. Today PPI is expected at just 0.4% yoy, with ex-food & energy 2.6%. Of course WTI was pretty much between 68 and 72 last month, and yesterday was more like $76/bbl, highest level in 2 1/2 months.
–Financial conditions shifted to a decidedly easier bias over the past few days. Since last Friday, July 7, the ten yr yield plunged 20 bps from 407 to 387. Dollar index from 102.27 to 100.53. SPX from 4400 to 4480.
SFRZ4 from 9584.5 to 9613.5…a larger than 25 bp forward ‘ease’. [These marks were taken before futures settlement, DXY now 100.28, ESU3 4520, SFRZ4 settle 9615.5 with 10y yield 3.855%]. Probably not what the Fed wants to see, as easier conditions can lead to renewed inflation expectations. Additionally, while base effects were a huge factor for yesterday’s CPI win, yoy comparisons will begin to get a bit tougher going forward. The Fed has steadfastly tried to convey the idea that rates will stay elevated. However, the red SOFR pack which is one year forward, starting with SFRU4, is now at a price of 9621 or just 3.79% from 4% on Tuesday, about the same yield as 10s. SFRZ3/SFRZ4 spread is again close to being inverted by 1.5% (settled -147.5, 9468 and 9615.5).
–The market is signaling smooth sailing ahead. And the WSJ leads off with this headline: Is the banking crisis over? We could be about to find out [as bank earnings start]. An interest rate curve with short rates higher than long rates is not a good environment for banking or the economy in general. However, markets are now breathing a big sigh of relief. Yes, a hike for July 26 remains solidly priced, with FFQ 9470 or 5.3%. But after the year 2023 ends, easing starts…
–Large exit seller yesterday 50k SFRZ3 9550/9650cs 4.75 to 5.0 (5.0s), but a later buyer of Z3 9487.5/9500cs for 2.5 in around 40k (2.25s). Buyer of SFRH4 9600/9700cs added 20k more longs at a price of 10.0, aggregate now over 70k. Settled 10 vs 9499.
–Earnings season starting to get underway. JPM releases on Friday.
–Along with PPI, Jobless Claims expected 250k. 30y auction as well.
