You WANTED inflation, well here it is
May 13, 2021
–They said there was going to be a temporary surge in inflation, and it’s here. CPI yesterday was 4.2% yoy with Core 3.0. Don’t expect much help from PPI today, expected +5.8% yoy with Core 3.8. Just for good measure, the NY Fed released its Underlying Inflation Guide at 2.7% for the full data set, up 0.5 from the previous month, and 2.9% for the “prices only” measure, up 0.3. The ten year tip breakeven ended at 261 bps, a new high. 2/10 and 5/30 both made new recent highs, but are below the highs from late March. Same with the red/gold pack spread in eurodollars (2nd to 5th year forward spread). It settled at a new recent high of 165 bps, but the peak close for the year was on March 31 at 182. All eurodollar straddles rose 0.5 to 2 bps. With the shift to a lower strike, the last long-dated green straddle closed over 100 bps; that would be EDH’24 9875 strike at 101 vs EDH’24 9880.5. There are 1040 days until expiration.
–SPX was down 2.1% and Nasdaq down 2.7%, but the ten year yield was still up 6.8 bps to 1.682%. It’s somewhat hard to justify a deeply negative ten-year yield with these inflation data. Today the treasury auctions thirties, with the when-issued just over 240 bps at the futures settlement.
–The recent buyer of 2EM 9937.5/9918.75 p 1×2 saw his upper strike move into the money with a futures settle of 9935 in EDM’23. The Fed may have to re-think the “taper before tighten” plan as the curve steepens. We’re probably only one bad auction away from a deviation in plan. Makes sense to cut the MBS buying with the red-hot housing market, but keep the bulk of treasury purchases going given gargantuan deficits. A rise in FF off zero would likely be more effective in tamping down inflationary expectations by flattening the curve.
–May Bitcoin contract currently under 50000 as Musk is scrapping the payment system due to environmental concerns. Currently 49525, down 4920 or just over 9%.
