(USTs BULL STEEPENED, belly BID on above avg volumes)while WE slept; "...reducing supercore inflation may require a more pronounced slowdown in overall demand..."
Good morning … What is about to follow — the morning AFTER a very good, market and FED friendly CPI — would seem to support the bond market ahead of it’s auction of 30yr duration later on today. While I’m perhaps a bit too cautious of spiking the football too soon, declaring victory on the war against ‘flation (Fed doesn’t control ‘Earl prices), some of what follows IS compelling …
Welp, how about that CPI … a few links
ZH: US Consumer Price Inflation Drops To 27-Month Lows; Longest Streak Of Declines Ever
ZH: Top 5 contributors to CPI, both headline and core, MoM and YoY (via BBG ECAN)
ZH: June RENT ‘flation 7.83% YoY (v 8.04%), LOWEST since 12/22
WolfStreet: Core Services CPI Cools to Still Red-Hot 6.2%, Core CPI to 4.8%. Plunge in Energy Prices Pulls Down Overall CPI to 3.0%. Food Stabilizes at Very High
ZH: Wall Street Reacts To Today's Surprisingly Weak CPI Report
Some more curated links below … which then set the table FOR 10yr auction … where the bid after 830a sort of robbed street of what little concession there had been,
ZH: Stellar 10Y Auction Tails As Yields Plunge Across The Curve
… While there may have been some headline weakness, it was nowhere to be seen at the bid to cover level, which rose to 2.53 from 2.36 in June and the highest since February; it was also well above the recent average of 2.45…
Leading TO the very next ‘question’ …
Momentum crossed bullishly as yields took a peak at / over 4% (nearly 4.10%) and are now paying another visit TO (triangulated)TLINE approx 3.90% … #Gotr30s?
AND … here is a snapshot OF USTs as of 715a:
… HERE is what this shop says be behind the price action overnight…
… WHILE YOU SLEPT
Treasuries have bull steepened overnight on god buying in the belly (cash and futures blocks) after yesterday's CPI here, good technical underpinnings and weak Chinese export data (link above). DXY is lower (-0.25%) while front WTI futures are little changed. Asian stocks were higher (solid gains in Japan, China and elsewhere), EU and UK share markets are all higher (SX5E +0.75%) and Es futures are showing +0.32% here at 7:05am. Our overnight US rates flows saw front-end buying (more 2-way action in intermediates and the long-end) during Asian hours on solid volumes then (150%). In London's AM hours the desk reported an 'aggressive' bid for the belly with short-covering in the front end a flow feature after CPI. A 17k FV block buy/cover set the tone early in London time. Overnight Treasury volume was ~125% of average overall with 3yrs (200%) and 2yrs (153%) seeing some relatively high average turnover this morning.… Tsy 2s5s curve, weekly: The Tsy 2s5s curve has clearly broken its flattening trend in place since March's banking issues erupted. But this curve has struggled to generate upside thrust- no doubt due to carry considerations and the widely-shared outlook that policy rates, and thus overnight RP levels, will ratchet higher on July 26th. At least we can assume that major support remains near -78bp, the double bottom move lows....
… and for some MORE of the news you can use » IGMs Press Picks for today (13 July) to help weed thru the noise (some of which can be found over here at Finviz).
From some of the news to some of THE VIEWS you might be able to use… here’s what Global Wall St is sayin’ …
First UP some news overnight from CHINA
Barcap China: No respite for exports
Exports saw broad-based weakness in June, with sharp drops in shipments to the US, EU and ASEAN. We expect exports to remain deep in contraction in H2 given weaker new-export orders. The drop in imports also widened on industrial metals, while oil imports surged as refiners returned from maintenance.
CSFB: China Data: Soft external demand as expected and will likely continue
In quarterly terms and upon seasonal adjustment, nominal and real exports in 23Q2 were 5.1% and 0.5% lower than those of 23Q1, while nominal and real imports were 1.9% lower and 1.1% higher in the same period, respectively, amid a falling import price index. (See Figures 1, 2, and 3.) In turn, the trade surplus increased to USD226.6bn in 23Q2 from USD203.4bn in 23Q1.
The weakness in external demand is consistent with our below-consensus narrative, and we expect ongoing softness in both external and internal demand to continue going into 23H2. Considering this outlook, we reiterate our policy expectation that authorities will likely remain tolerant of a relatively weaker RMB against the USD (link) and expect USDCNY to remain around 7.20-7.25 throughout 23Q3.
Our relatively conservative real estate investment outlook and our expectation that inventory re-stocking might not happen until 23Q4 (link) imply weak domestic demand through 23Q3. Consequently, such weak domestic demand is likely to exert continued downward pressure on Chinese imports, and we have diverging outlook on China’s commodity demand as well (link).
GS China: Export growth surprised to the downside in June
Bottom Line: Export value declined sharply in June in both year-over-year and sequential terms, below the consensus forecast. The weakness of exports was broad-based across major trading partners and products, suggesting soft external demand. The import value of commodities declined somewhat on falling prices, but the volume growth remained solid. Trade surplus rose moderately in June (US$70.6bn vs. US$65.8bn in May).
AND a couple / few CPI victory laps and ‘i told ya so’s,
ABNAmro June disinflation won’t derail a July Fed hike
The disinflation trend continued in June. While this won't derail a July Fed hike, it increases our conviction that this will be the final rate rise.
Barclays June CPI: Curb your enthusiasm
Core price pressures eased in June, with core CPI at 0.2% m/m (4.8% y/y), about two-tenths lower than in May. Core goods slid back into deflation, helped by a decline in used car prices, while core services inflation eased materially, due almost entirely to lower airfares and lodging costs.… While today’s CPI data brought good news on the inflation front, we expect the FOMC to look through the fluctuations in the volatile categories, and to maintain its view that it needs to hike rates further to eventually bring inflation back to its 2% target on a sustained basis, in line with the June Summary of Economic Projections (SEP). In addition, the FOMC will likely pay more attention to the PCE deflator, which has a considerably wider scope and uses a measure of airfares from the PPI that frequently differs from the CPI estimate. Moreover, given the continued labor market resilience, we expect the Fed to see more evidence that the self-reinforcing dynamic between employment, income and spending continued into June. Accordingly, we maintain our call for a 25bp hike in July, consistent with indications from the SEP, minutes, and recent Fed communication. We also maintain our expectation that the FOMC will then proceed with a second hike, likely in September, although today’s CPI may convince it that it can wait until November before further tightening policy
Bloomberg (John Authers OpED): Getting so much better, but not enough to stop a rate hike
… The Atlanta Fed produces indexes on “sticky” inflation, for goods and services whose prices are difficult to change. Rising stickiness can be particularly damaging for attempts to bring inflation down. But the problem seems to be coming under control, particularly when using a “super-core” rate that excludes shelter:
In short, this looks much less like a “head fake” (as colleague Jonathan Levin puts it) toward lower inflation than then previous alarms of the last two years.
BNP US June CPI: Firmer disinflation trend kicks into gear
KEY MESSAGES
A relatively cool June CPI report still signalled that non-housing services inflation will likely require a weaker labor market to move appreciably closer to target-consistent levels.
However, an intensifying downtrend in goods prices should slow the pace of price gains in H2 compared to H1, pulling core CPI inflation down to 3.5% y/y by year-end (from 4.8% currently).
While the Fed looks set to hike later this month, the anticipated step-down in inflation should reduce pressure to tighten beyond July.
DB: June CPI recap: Cool summer breeze
The June CPI data came in softer than consensus, with headline and core both up by 0.2% from May. While the composition of the data was broadly in line with our expectations, airfares surprised significantly to the downside. Taken together, the year-over-year rate for headline fell a whole percentage point to 3.0%, while core fell half a percentage point to 4.8%.
Our forecasts are little changed following this morning's data, with core CPI Q4/Q4 rates remaining at 3.6%, 2.5% and 2.5% for 2023-2025. Our core PCE forecasts also remain at 3.6%, 2.2%, and 2.2%. The analogous forecasts for headline are 2.7%, 2.1% and 2.3% for CPI and 3.1%, 1.8%, and 2.0% for PCE.
On balance, the Fed will certainly welcome the progress evident in this CPI report, particularly the softening in super-core inflation. That being said, such progress is likely too tentative to prevent the Fed from raising rates by 25bps at their July 26th meeting. Today's data do, however, raise our level of conviction that the July hike will be the final one, even if incoming data over the next couple months will be crucial in determining if there is more work to be done.
GS: 28-Month Low in Monthly Core CPI Inflation
BOTTOM LINE: June core CPI rose by 0.16%, its smallest increase since February 2021, and the year-on-year rate fell five tenths to 4.8%, both below consensus. While a sharp decline in airfares lowered the core reading by 6bps, shelter categories slowed modestly further, and we believe the 0.5% drop in used car prices is the beginning of a larger pullback. Today’s report is consistent with our view that Fed tightening is in its final innings. We continue to expect a final 25bp hike at the July FOMC meeting to 5.25%-5.5%, followed by unchanged policy for the remainder of the year.
ING: Good news on US inflation won’t prevent a July rate hike
US inflation pressures are showing broader signs of moderation with both headline and core rates undershooting expectations. Nonetheless, the Federal Reserve seems intent on pushing ahead with a July rate hike, but the need for additional tightening thereafter is questionable
JEFF: Jun CPI +0.2%, Core +0.2%... Some Encouraging Signs of Disinflation, but Will it Persist?
… The Fed has been consistent in signaling that there is more work to be done on getting inflation back down to target. They seem to be skeptical about the prospects for more weakness in aggregate demand to be delivered from their rate hikes to this point. We remain of the view that there is still more pain to be realized from these past hikes, but it will take some time before the Fed sees this phenomenon in the data …
… The bottom line is that the Fed's recent communication suggests that they need to see more evidence of slowing inflation before they are confident that they have done enough with monetary policy. This report is encouraging in some respects, but the strength of the labor market data, the pickup in wage gains, and the firm nature of the CPI components related to the service sector makes the data difficult to trust at face value …
LPL: Inflation Continues To Deflate
Consumer prices rose 0.2% in June, pushing the annual rate of inflation down to 3.0%, the lowest annual rate since March 2021.
More importantly, inflation, excluding food and energy rose 0.2% in June, the smallest monthly gain since August 2021.
The largest contributor to the monthly increase in prices was shelter costs, accounting for over 70% of the increase this month.
Grocery prices were unchanged in June, providing a bit of a reprieve for lower income households; however, more consumers are eating out.
The overall theme in recent months has been strong consumer demand for experiences over material goods and we are seeing that play out in consumer pricing dynamics.
Yardeni: June's CPI Was Cool
It's been a hot summer. But inflation is still cooling off. Today's June CPI report showed that the headline inflation rate rose 0.2% m/m and 3.0% y/y (chart). The core rate also rose 0.2% m/m and 4.8% y/y.
With these in mind, an official note of sorts where Mary Daly’s group at FRBSF offers
FRBSF Economic Letter: Will a Cooler Labor Market Slow Supercore Inflation?
…Conclusion
Using state-level data, this Letter shows that, while services inflation is significantly linked to labor market conditions, this relationship is largely due to rent inflation. In contrast, we found only a weak relationship for supercore inflation, which removes housing services. Still, supercore inflation responded more strongly to unemployment rates early in the recovery from the pandemic, possibly due to health concerns that reduced the responsiveness of labor supply to wage increases. If this increased sensitivity continues, supercore inflation could help reduce inflation significantly with only moderate aggregate demand and labor market softening. However, if supercore inflation returns to its lower pre-pandemic sensitivity, reducing supercore inflation may require a more pronounced slowdown in overall demand.
AND in other news, Paul Donovan touches on just about everything possible — saying very little (IMO)
UBS: The beginning of the end of profit-led inflation?
US consumer price data showed inflation slowing more than nominal wages, especially for middle-income consumers whose inflation experience is less than the headlines suggest. It is unclear how much credit the Federal Reserve can take for this—the 2021 transitory inflation turned to deflation without the Fed’s help, and Fed Chair Powell has little authority over energy prices.
The Beige Book’s anecdotal evidence noted some companies were reluctant to raise prices because consumers were more sensitive about price increases. This may mark the beginning of the end of profit-led inflation; companies have to worry about damaging their brand if they keep expanding margins. Today’s US producer price inflation data release better represents the pricing power of most listed companies, and will not reflect profit-led inflation.
China reported slowing imports and exports in June. Slower imports reflect the service sector bias of China’s domestic demand (services require few imports). The export data is consistent with the inevitable slowdown in global goods demand, but China’s numbers may exaggerate the trend. Export strength in the first quarter, which fortuitously boosted GDP, may have come at the expense of second quarter exports.
UK activity data gives a picture of slower economic activity, but perhaps less of a slowdown than had been expected.
Touching on everything without saying much is one thing while another angle would be to say LOTS without saying too terribly much at all.
DB: Taking stock of an upside-down 2023
…The relationship between stocks and bonds normalised in H1. That suggests equity risks if yields fall in the event of a recession
UPSIDE-DOWN indeed … food for thought ahead of today’s long bond auction as is this next story from The Terminal and Ven Ram (AT ven_word)
Duration Bias Puts Back-End Treasuries in Spotlight: Macro View
(Bloomberg) -- Long-dated Treasuries face an increasingly asymmetric risk profile as an aging economic cycle skews the risk-reward equation in their favor.
* The yield on 10-year Treasuries has surged more than 50 basis points in the past couple of months. Monday’s closing level of 4% makes the maturity fairly valued, meaning any further increase in yields would make it cheaper based on a valuation model that takes into account current real rates, inflation expectations and the economic outlook
* A simulation suggests that a 25-basis point decrease in real rates and expected inflation will send the yield to 3.45%, which represents considerable upside for the maturity. There may reasons to believe that 10-year real yields, now about 1.76% — around the highest since the aftermath of the financial crisis — may consolidate around current levels* The nominal 10-year Treasury maturity may still face downside should the Federal Reserve seek even higher ground on interest rates than outlined in its June dot plot, thereby spurring real rates. A simulation suggests that a 25-basis point increase each in real and expected inflation will send the 10-year yield to
around 4.50%* However, that scenario — an outlier — will mean that there is a revival of inflation concerns that causes the Fed to revise its estimate of the terminal rate even higher than 5.625% now
* The risk-reward outlook for the 10-year nominal maturity is in stark contrast to two-year Treasuries, which face more downside as they are considerably richer on the curve than they ought to be. My estimate is that this yield will reach 5.22% should the Fed funds rate reach the level indicated in its dot plot
* If the assessment is right, the inversion in the yield curve between the two segments, around -89 basis points now, will worsen to -124 basis points. That would be the deepest since 1981. In May that year, the inversion reached -170 basis points before the economy tumbled into a recession in July
* A deepening of the inversion in the yield curve would be consistent with the Fed having some more room to raise rates before the economy weakens to a point where policy makers would abandon further tightening
* The US Treasury Note 10-year exchange-traded fund, which seeks to mimic the performance of the ICE BofA Index of the compatible maturity, is now trading near the lowest since its inception last year. Even so, recent fund flows don’t show that traders are making a beeline for duration, suggesting that it isn’t a crowded trade yet
* However, given an aging economic cycle and assuming the Fed sticks to its dot plot, Treasury 10-year bonds are well placed to exploit their asymmetric risk-reward profile
Finally, in closing … with THAT and this afternoons 30yr in mind, what IF …
While the consensus is lower Treasury prices (higher rates), the 10-Year Note may have just made a 4th higher low.
7:03 AM · Jul 12, 2023
AND … THAT is all for now. Off to the day job…