CPI today as NY Fed cites lowered expectations
December 13, 2022
–Yields rose Monday in front of today’s CPI report, the curve was flatter with the 2y yield +7.3 bps to 4.401% and tens up 5 bps to 3.615. On the ED & SOFR curves, reds (2nd year forward) led the way lower, -7.375 while greens (3rd year) were -6.875 and blues -4.25. The ten year auction was soft, tailing over 3 bps, 3.625% vs 3.588 at 1 pm. Bid to cover just 2.31. In some ways it’s surprising that selling pressure was slightly more concentrated on the front end, but apparently there are still those that need to hedge against a hawkish CPI/Fed outcome. CPI yoy is expected 7.3% vs 7.7 last, with Core 6.1 vs 6.3 last. EDZ2 9525 straddle settled 8.5 vs 9522.5, with buying at 9.0 yesterday even though the contract expires on Monday and libor is pegged just a shade above 4.75%. Thirty year auction today.
–Stocks seem inclined to side with the NY Fed’s inflation expectations data: “Median one-, three-, and five-year-ahead inflation expectations decreased to 5.2 percent, 3.0 percent, and 2.3 percent, respectively, according to the November Survey of Consumer Expectations.”
SPX rose 1.4% and JPM is forecasting a powerful rally if CPI comes out lower than expected.
–EDZ2/EDZ3 one-yr calendar made a new recent high of -2.5 (9522.5/9525.0); same with SFRZ2/Z3 at -4.75 (9546.25/9551.0). However, while Z2 and Z3 prices are nearly the same the June’23 contracts in between are forecasting a peak yield around 5%, with EDM3 9479.5 (5.205%) and SFRM3 9503.5 (4.965%). There’s going to be a lot of analysis of end-of-2023 dots, but I sure don’t know why; overall the Fed’s projections have been horrible. In September, regarding the FF forecast for end of 2023, there were 6 dots with a midpoint of 4.375%, 6 with a midpoint of 4.625% and 6 at 4.875%. I suppose those will ratchet a bit higher, but my guess is that it won’t make a bit of difference after a day or two.
–One last note, the US deficit for November was a whopping $249 billion as tax receipts fell.
https://www.fiscal.treasury.gov/files/reports-statements/mts/mts1122.pdf
See page 6 of 40. The technical way I like to look at this is: The green bars are getting smaller and the blue bars are getting bigger! More seriously, if tax receipts are declining due to a slowing economy, and the Fed is shedding treasuries and has a GOAL of slowing the economy (and thus tax receipts), then who is going to buy this 30y auction?
