Flattening of back end continues
July 16, 2021
–Empire Mfg yesterday was 43.0, the highest ever. Import Prices were +11.2%, near the highest, although the oil surge in 2008 saw a print of +21.4. Though data isn’t uniformly strong, it is still surprising that yields were crushed yesterday, with tens down 5.7 bps to 1.297%. The curve flattened, with many measures making new recent lows. For example, 2/10 fell over 5 bps to 117.5. Red to gold euro$ pack spread (2nd to 5th year forward) imploded by 7 bps to settle at 104.25. As the attached chart shows, the June 16 FOMC with its hawkish dot plot was the unmistakable catalyst for back end flattening. On June 15, EDZ2/EDZ3 was 54.5. It settled 56.0 yesterday, essentially sideways. Further back, EDZ3/EDZ4 was 52.5 on June 15, it has now collapsed to a new low of 33.5. If rates were at a much higher base, I could understand the flattening, but not from these absolute levels given actual inflation. However, an interesting (brief) thread on twitter from Dave provides a bit of insight, noting that GSIB’s continue to buy longer dated assets to manage reserves and compensate for weak loan growth.
https://twitter.com/djr8519/status/1415809556618354699
In any case, while there are no projection materials at the July 28 FOMC, it’s completely plausible that there will be dissent. Will back end flattening have run its course by then?
–Today’s news includes Retail Sales, expected -0.3 (ex-auto and gas expected +0.6). All I can tell you for sure is that gasoline is taking a bigger bite out of the budget. U of Mich inflation expectations also released, but it’s clear that for now the data on prices is meaningless to the market.
–July option expiration in equities, carrying a small possibility that yesterday’s relative weakness in Nasdaq will be exacerbated.
