Markets focused on signs of economic weakness
January 9, 2023
–The reaction to Friday’s data left us with an additional ‘ease’ priced into reds. June’23 is the lowest contract on the SOFR curve at 9506.5, up 8.5 on the day. But one year forward, SFRM4 was up 29.5 at 9605, and the strongest contract was U4, up an astonishing 30.5 bps to 9681.5. SFRU3/U4 is the lowest 1-yr calendar, and posted a new low for the cycle at -157.5 (9524/9681.5). YOY hourly earnings in the employment report were up only 4.6%, and the workweek fell to the lowest of the year at 34.3 hours. All this while the unemp rate printed 3.5%, pinned to historic lows with NFP +223k. Non-mfg ISM plunged below 50 to 49.6, leaving both Mfg and Service ISM sub-50.
–The treasury curve steepened, with twos down 19.1 bps to 4.258% and 5s down 20 bps to 3.712%, while tens fell ‘just’ 15 to 3.57%. EFFR is currently 4.33%, so about 5/8% of negative carry on the 5y note, and it’s going to get worse after another hike on Feb 1. On Friday Pozsar of CS said the Fed is likely to restart QE by June. If no one else can be relied upon to buy new US debt, we’ll just do it ourselves. 2/10 ended at -67 bps, which is still down 20 bps from what ultimately turned out to be a false breakout on Dec 28. A close above -47 would be technically positive.
–Powell speaking tomorrow. Auctions kick off with 3s tomorrow, followed by 10s and 30’s Wednesday and Thursday. CPI Thursday.
