CPI
October 13, 2022
–CPI today expected 8.1% vs 8.3 last, with Core 6.5 from 6.3. Jobless Claims 225k from 219. Intel cutting 20% of its workforce. 30 year auction today, following less than stellar results in tens, though modest weakness in TYZ quickly reversed.
–FOMC minutes yesterday. Staff saw risks to baseline projections in economic activity. Participants expect below-trend growth for the next couple of years and see upside inflation risks. A couple of clips:
Participants agreed that the uncertainty associated with their economic outlooks was high and that risks to their inflation outlook were weighted to the upside. Some participants noted rising labor tensions, a new round of global energy price increases, further disruptions in supply chains, and a larger-than-expected pass-through of wage increases into price increases as potential shocks that, if they materialized, could compound an already challenging inflation problem. A number of participants commented that a wage–price spiral had not yet developed but cited its possible emergence as a risk.
Many participants emphasized that the cost of taking too little action to bring down inflation likely outweighed the cost of taking too much action. Several participants underlined the need to maintain a restrictive stance for as long as necessary, with a couple of these participants stressing that historical experience demonstrated the danger of prematurely ending periods of tight monetary policy designed to bring down inflation. Several participants observed that as policy moved into restrictive territory, risks would become more two-sided, reflecting the emergence of the downside risk that the cumulative restraint in aggregate demand would exceed what was required to bring inflation back to 2 percent.
–EDZ2 closed at a new low contract settle 9511.0, having printed 9507.5 post-PPI. SFRZ2/EDZ2 spread settled 41, not quite through the recent high of 42. 3-month libor set just above 4% at 4.01096 yesterday, the first time above 4 since the 2008 GFC credit-induced spike. With just two months until December expiration, EDZ2, which will still settle to 3m libor, is nearing 5%. Treasury Sec’y Yellen is fretting about liquidity in the treasury market, while SFRZ2 settled 9552.0 or 4.48%, which implies negative carry across the entire treasury curve by year-end. Hmmm, ten-year yield 3.90% and repo at 4.48%. We’re confronting some real head-scratchers. Oil and energy are going back up as winter nears, after Biden drained the SPR. And the Treasury is wondering who is going to buy all the treasuries, now that the Fed put their hands in pockets. I guess Treasury will just have to come up with the incentives for domestic banks to absorb debt. NO ONE COULD HAVE SEEN THIS COMING.
–SPX ended Wednesday at its lowest level since November 2020. It’s worse for Nasdaq Comp. low since August 2020.
