Feb 22. Official stats vs market perception
–The curve flattened to new lows on stronger than expected CPI, with yoy Core +2.2% a 4 1/2 year high. Whenever it seems plausible that the Fed might tighten at a somewhat faster pace (even though ‘faster’ has now been demoted to perhaps two or three times in a year), the curve flattens as the tinge of slightly more restrictive monetary policy is seen as putting a stranglehold on the economy. Red/gold pack spread fell 5 bps to a new low just over 83 bps. Two/ten treasury spread is just over 100 bps, having ended the year at 122. As mentioned earlier, strong gains were seen in the prices of medical care services and shelter. Interesting that official stats on inflation have generally been firming while market based measures have been declining. For example, (and no, I don’t think this is the BEST measure, just instructive) the spread between the ten year inflation indexed note and ten year treasury averaged 156 bps in November through December. It’s now just 127 bps, having hit a low of 120 two weeks ago. And actually, in terms of the pace of tightening, there are no near one-year euro$ calendar spreads above 30 bps. The ED curve reflects odds of 1 or maybe 2 hikes. In fact, the whites (front four) as a pack spread to the reds is 19 bps and reds/greens is 25.75.
–This morning ESH is up 22, and gold down 25. The British pound is getting clobbered as Brexit edges closer to reality, now 141.50 having been as high as 155 at the start of November. Light news day includes Chicago Fed National Activity Index, which was a soft -0.22 last.
–Saw this interesting snippet today: Mexico is changing the way it will intervene in FX markets…from the Foreign Exchange Commission there: “As we have long been stating, the FX intervention pattern adopted by Banxico was easily absorbed by market players and resulted in significant losses in internat’l reserves without any measurable impact on MXN dynamics.” I’m not saying that China doesn’t have far greater firepower than Mexico, but it’s still a cautionary tale for FX intervention.
