Inflation expectations
March 29, 2019
–In one of his recent speeches, Powell highlighted the importance of inflation expectations in terms of policy. From a Bloomberg article dated March 15: “Testifying before Congress on Feb 26, Powell called inflation expectations ‘the most important driver of actual inflation.’ ” If that’s the case, then the U of Mich inflation expectations data out later today is quite important. The attached chart shows a complete round trip for 1-year expectations, from +2.4% in late 2017, to +3.0% in mid-2018, back to 2.4% last month. We will also be getting PCE Core yoy prices, expected 1.9%, and New Home Sales at 620k units. Given that shelter is (I believe) about 33% of PCE prices, continued weakness in housing has an impact on this data.
–Yields rose yesterday as stocks are set to close out the quarter on a high note. The curve flattened as fives rose 2.8 bps, tens +1.6 to 2.388% with bonds falling nearly 1 bp. In eurodollars, reds were weakest, dropping 4.5 bps with greens -4.375. Flows were dominated by put buying. According to prelim volume figures, EDZ9 put volume was a whopping 5.36 million contracts! The EDZ9 9750/9737/9725/9712 put condor has at least 400k long outstanding (settled 4.0). There were other variations on the theme as well, including a buy of 50k 9737/9725/9712 put flies for 1.5, and 9762/9750/9737 put flies for 1.5. Closer up, about 25k EDN9 9737/9725 put spreads were bought for 0.75. Almost everything noted here is based on an idle Fed through the end of the year, i.e. no rate cuts. However, January 2020 Fed Funds are still at 9789, fully 29 bps lower in yield than the current Fed Effective rate of 2.40%. So that’s the drama. All near eurodollar calendar spreads are inverted, indicating expectations of ease. Fed funds say the same thing, with at LEAST one ease priced into the end of the year. But put buyers are fading that idea.
–It’s worth noting that not only are stocks ending the quarter with strong gains (SPX +12.3% ytd), but WTI crude is also up about 28% on the quarter, with the May contract CLK9 nearing $60 this morning. The Shanghai Comp surged over 3% today, bringing the gain over Q1 to a sizzling 24%.
