Defining near-term parameters
August 11, 2022
–Rate futures were strongly geared toward a high CPI number; EDZ2 traded 9600 or 4% just prior to the data, testing the NFP low from Friday which was 9599.5. The actual month/month print of zero caused a panic short squeeze, taking EDZ2 to a high of 9626.5. Similarly, EDU3 had a range of 9643 to 9668 or 25 bps, putting in the entire day’s range within a couple of minutes post-data. EDU3 came back to settle at 9650.5, nearer to the low of the day as Evans and Kashkari suggested little change in the Fed’s rate path (3.5 to 4% by year-end). A piece by WSJ’s Nick Timiraos made the same point. With two days until expiration 0EQ 9650^ settled 12.0. Never thought we’d see a relief rally with Core yoy CPI 5.9%.
–FFV2 contract traded to a high of 9712 but fell back to settle at 9706 or 294, almost the exact midpoint between a hike of 50 (which would take EFFR to 283) and 75 (which would take EFFR to 308). Prior to CPI the market was heavily leaning for a 75 bp hike at the Sept 21 FOMC; the low on NFP was 9696 or 304. Yesterday’s high of 9712 is just 5 away from 50. Perhaps the tone of the entire short end can be defined by FFV2: the parameters have been clearly set for the Sept FOMC. Going further, FFV/FFX spread settled 36 almost the exact midpoint between 25 and 50 for the November 2 meeting. Unsurprisingly implied vol declined somewhat. Likely to be a slow two weeks going into Jackson Hole symposium, which starts August 25.
–The long end is a different story, with bonds closing lower on the day. The 30yr yield ended +3 bps at futures settle to 303.4 in front of today’s auction. If Fed is going to be hiking less aggressively then naturally the curve should steepen a bit, especially from very depressed levels. 2/10 ended at -43, up 5.7 from yesterday. 5/30 jumped 8.8 to 11.4.
–PPI today expected 10.4 from 11.3, with Core 7.6 from 8.2. Jobless Claims expected 260k.
