CPI… already in the rearview mirror
June 10, 2021
–Nearly all eurodollar calendar spreads etched out new recent lows as the ten year auction was well received, with tens closing just under 1.5%. 2/10 at a new low of 133.3, down 4 on the day, while 5/30 ended at 142.4. Red/gold pack spread closed -4.375 at 146.25, just below 50 bps per year on average over those three years. That is, red/green (2nd to 3rd year) at 49 bps, green/blue (3rd to 4th) 55.5 bps and blue/gold (4th to 5th) at 41.75. One could conclude that the market is roughly forecasting two hikes per year starting in the second half of 2022.
–The big number today is CPI, with yoy expected 4.7%. Whether it’s lower or higher doesn’t seem to be the issue, the market trades as if inflation simply can’t be sustained. Jobless claims expected 350k, and the treasury issues 30 year bonds as the Fed’s RRP totaled a record $502 billion. My view is that the extraordinary amount of excess reserves reflected by RRP could be somehow linked to what appear to be some pretty dumb investments. Of course, if that’s the case, then one would have to conclude that the Fed is slightly derelict on the whole “financial stability” function. And that conclusion would run counter to another report released today, which is the Fed’s quarterly Z.1 flow of funds report. This report will surely show a new record high in American’s net worth. How could net worth be making record highs if the Fed isn’t doing its job?
–Even before the last hike in December of 2018 (to 2.50/2.75%), the market had signaled that the Fed was too tight. From Q4 2018 to Q3 of 2019, as the Fed reversed course and began to ease, the ten year went from over 3% to around 1.5%, where it is now. In Q4 as the Fed made its last cut of the year (to 1.5/1.75%) and tens were trading around 1.75 to 1.9%. Now we have drifted back down to the low yield of 2019 again, almost as if bad things are on the horizon…
