Decelerating inflation supports bonds, but someone still has to BUY them
September 19, 2022
–CPI today expected 8.0 yoy vs 8.5 last, with Core 6.1 vs 5.9. USD continues its retreat this morning, with some looking for a 7 handle on the headline number.
–Yesterday the NY Fed released Consumer expectations:
“Median one- and three-year-ahead inflation expectations continued their steep declines in August: the one-year measure fell to 5.7% from 6.2% in July, while the three-year measure fell to 2.8% from 3.2%.”
Positive news for treasuries, yet auctions were poorly received, with the ten year tailing by 2.7. The yield was 3.33%, bid to cover 2.37, but at futures close the yield was 3.358. up 3.9 on the day. Thirty year auction today. Also today is NFIB small business optimism index, expected at 90.8 vs 89.9. The last two months were the lowest levels since 2013. Deteriorating economic data argues for higher bond prices, but somebody still has to actually BUY them, and it’s not the Fed
–At this point, expectations for 75 bps have solidified for next week, with FFV2 again settling 9694 or 306 bps, versus what would be the new Fed Effective of 308 on a hike of 75. The Oct/Nov FF spread settled up 0.5 to 50.5. Powell’s Jackson Hole speech was crystal clear about previous lessons: “keep at it until the job is done”. Pricing in the very short end has accepted the idea of moving to restrictive funding rates. However, SFRZ2/SFRZ3 remains inverted at -33.
–No 3-month libor setting on Monday Sept 19, due to the Queen’s funeral. EDU2 settles to libor; the CME will now use Friday’s setting as final settle.
