Deceleration in prices. Except eggs
January 13, 2023
–$/yen 128.50, having traded 128.11 earlier, the lowest level since June, as talk of the BoJ abandoning YCC circulates. 10y JGB breached the 50 bp cap though BOJ buying has brought it back down to that level. As a BBG report previously said, “Japan is the largest exporter of capital to the world” so the idea of yen strength along with higher yields might make that capital less available globally.
–Wildly large ranges on the CPI release yesterday even though data was exactly as expected: -0.1% mom, yoy 6.5, with Core 5.7. USH contract had an instant 2 point range. Ultimately yields fell with tens down 10 bps to 3.453% and the 30y down 9.7 bps to 3.58% after solid auction results. At the Feb FOMC, EFFR is expected to rise to 458 bps, exactly 1% higher than yesterday’s 30y yield.
–What happens when the market tests the resolve of the central bank? We’re seeing sharp dislocations in Japan, but in the case of the US the market has consistently priced easing later this year even as Fed officials telegraph resolve on the inflation fight. On the SOFR curve, new lows once again in near one-yr calendars: H3/H4 at -109 (9515.5/9624.5), M3/M4 -158.5 (9512/9670.5) and U3/U4 -168.5 (9531.5/9700). The latter is the lowest on the strip and a new low for the cycle. It is NOT forecasting good things in the US economy.
–Interestingly, if one looks at the FF futures curve, the conclusion might be that the market believes the Fed. After all, the expiring (Jan) FFF3 which is already pegged to EFFR at 433 bps is 9566.75 and FFF4 is close to the same price at 9562. However, FFG3 is 9540.5 and FFG4 is 9585.5 (G=Feb). In the wake of CPI data, the market has cemented expectations for a 25 bp hike on Feb 1 (expected final settle for FFG3 is 9542.9,and the contract was trading 41 yesterday). So, the FFF3/G3 1-month spread at +26.25 isn’t at all surprising. However, in the beginning of next year FFF4/G4 is -23.5, so we’ve already penciled in an ease for next Feb. Looked at in terms of 1-yr calendars, Jan23/Jan24 is +4.75 while Feb23/Feb24 is -45.0.
–Quick note on SFRZ3, which settled +6 at 9571.5. Large block sale from Wed morning at 61.5 is 10 underwater… for now. Fed SEP year-end 2023 FF projection from the Dec FOMC was 5.1%. SFRZ3 is consistent with 4.25%. As I’ve mentioned recently, before year end, SFRZ was around 9550 and the atm straddle was 100. As the atm strike moved to 9562.5 the straddle was sold repeatedly, bringing it to 81. Yesterday the 9575 atm straddle settled 76, as all premium compressed post-CPI.
