No help from CPI; wage gains in Japan clear the way for BOJ hike
March 13, 2024
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–CPI higher than expected yesterday, pushing yields up. Headline 3.2 and Core 3.8 yoy, both 0.1 hotter than forecast.
From Michael Ashton @inflation_guy
Now, the story starts to become a little clearer, albeit concerning. Core services rose to 5.4% y/y from 5.2% y/y, while core goods was unchanged as I noted above. Rents are coming down, but outside of rents we are seeing some stabilization at higher-than-pre-COVID levels.
…With this, and with Core Services ex-shelter (“Supercore”) at +0.47% m/m – which means supercore accelerated to +4.3% y/y – it is inconceivable that the Fed will yet consider cutting rates. It is possible that they may later in the year, but there is far too much exuberance in the bond market about that prospect.
Tens rose 5.3 bps to 4.153%. Twos up 6.3 to 4.595%. 2/10 only 1 bp above its recent low of -45.2. On the SOFR strip reds down 9 bps, greens down 7.25. This spread is right at its recent low, just above -33. Ten-year re-opening was 4.152% at cut-off but actual result was 1 bp through at 4.162%. Thirty year auction today.
–Implied vol was hammered across the curve. For example, SFRH5 9587.5^ settled 95.75 on Tuesday, and 93.25 yesterday. (Futures from 9591.5 to 9582.5). TYJ4 111.5^ was 1’10 Monday vs 111-19; yesterday TYJ4 111.25^ settled 0’61 vs 111-055. Of course, April options expire just one week from Friday, but the market perceived CPI as the big event of the week. Late seller (adding) to TYK4 109.5/113 strangle, -12k at 0’44, settled 0’46.
–There is still considerable expectation for ease reflected in near FF contracts. July (FFN4) settled 9486.5 or 5.135 bps vs current EFFR of 5.33. Assuming next week’s FOMC is dead, this contract captures May 1 and June 12.
–From the Japan Times regarding wage negotiations (clearing the way for a BOJ hike):
This year’s annual negotiations, known as shuntō, conclude this month and are being monitored especially closely by policymakers, as developments could be a decisive factor in the Bank of Japan’s decision on whether to adjust its ultraloose monetary policy next week or next month.
Toyota, Japan’s largest automaker, has fully accepted workers’ demands and offered its largest wage hike since 1999. The carmaker’s labor union had demanded a hike of between ¥7,940 ($54) and ¥28,440 for monthly wages depending on job type and position. Toyota will also raise salaries for new employees.
–It’s plausible that a hike next week by Japan could undermine support for long US treasuries, thus tightening financial conditions.
–Interesting post re: US Gov’t spending by EJ Antoni
Over 52% of federal gov’t spending in Feb was financed by debt – MORE THAN HALF:
