One more straw
June 1, 2021
–Reflation trade this morning with July WTI over $68/bbl at a new high. China raised the FX required reserve ratio from 5 to 7% in order to stem the strength of the yuan and it is having the intended effect with CNY now 6.38. Eurozone Markit Manufacturing PMI released this morning at 63.1, a new high, with input prices at 87.1 from April’s reading of 82.2, “easily the highest on record”. US rate futures are lower this morning with TYU down 8 at 131-22.
–US Manufacturing ISM today expected at 60.9 with prices 89.8. Thus far rate futures have absorbed every straw of high inflation data without budging in price, but the weight of evidence is growing. Even if inflation isn’t sustained at the current levels, extraordinary accommodation seems misplaced. The employment report is slated for Friday morning, with NFP expected 650k.
–The peak one-year eurodollar calendar spread is EDM’23/EDM’24 which settled Friday at 69 bps. It’s less than 10 off the high settle of the move which was 78 in early January. For the sake of comparison, the spread was around 15 when the Fed announced its change of framework in August. Of course, June of 2023 is when libor ends, thus making this spread a bit higher than others, but EDU’23/EDU’24 is still 61.5 bps. Compare these spreads with June’22/June’23 at just 38 bps. Rate hikes are currently priced more aggressively further out the curve, but may move more forward as inflation and economic data continues to strengthen.
