Everything’s at 3%

July 1, 2022

–Eurozone inflation record 8.6%.  Yesterday’s PCE prices were slightly lower than expected with headline at 6.3 and Core 4.7 vs 4.8 expected.  Chicago PMI 56 vs expected 58.  Weakness in equities to close out June (worst first half in 50 years) helped yields fall.  Tens sank just below 3%, down 11.8 bps to 2.97%.  As shown on the attached chart, SFRU2 settled 9704.5 or 2.955%,  So positive carry in treasuries has evaporated. (SOFR is the repo rate on treasuries). 

–There were a lot of new recent highs and lows in various spreads.  First, the ten-yr treasury to tip breakeven fell below 235 bps, i.e. inflation expectations appear to be compressing.  Second, EDU2/EDU3 plunged another 14.5 bps to settle barely positive at 4.0.  That’s down 50 bps from FOMC day on June 15 (54.5).  EDU2/U3 is now the only positive 1-yr calendar on the ED strip until EDU4/EDU5 which settled +2.0.  The most negative spread is EDH3/EDH4 which settled -64.0.  Consider the prices on the first 5 ED contracts:  EDU2 9679.5, Z2 9631.0, H3 9638.0, M3 9656.5 and U3 9675.5… subsequent prices are higher (lower yields).  It’s clear that the market perceives end of hikes at end of year.  Third, with reds (second year forward) the star performers at +20.875 on the day, reds to more deferred steepened.  Red/gold (2 nd to 5th) finally settled positive at 2.375.  FFF3/FFF4 settled -44.5; nearly 1/2 percent of easing priced for next year.

–Treasury curve steepened as fives led the yield decline, falling by 14.6 bps to 3.002.  Thirties down 8.8 to 3.121.  Almost every yield on the curve is clustered within 15 bps of 3% excluding the first few ED contracts which reflect the front-loaded Fed obsession.   

–Atlanta Fed GDPNow was marked down to -1.0% for Q2.  Already in recession territory.  Today ISM Mfg is released, last at 56.1.  It’s expected 54.9 but there has been some talk of a sub 50 number. 
–Happy 4th!!!

Posted on July 1, 2022 at 5:37 am by alexmanzara · Permalink
In: Eurodollar Options

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