ZH: Goodbye Inflation? CPI Misses Across The Board
I do NOT envy the FED … The impact on markets near and far was immediate and felt long after into the days liquidity event (30yr auction), as yields dropped
ZH: Dismal 30Y Auction Tails Amid Lowest Demand For The Year
And by days end on into evening and … this morning, too … a visual of TERMINAL FF (HERE) sets table for today. So, too, does this visual of 2yy — while a dramatic move YESTERDAY, when viewed in context of 1yr of data, perhaps it wasn’t THAT big a deal,
50dMA up nearer 4.43% seems to be an interesting ‘inflection point’ worth watching for those trying to TRADE THE FOMC (for more on THAT see below) …
… here is a snapshot OF USTs as of 705a:
… HEREis what another shop says be behind the price action overnight…
… WHILE YOU SLEPT Treasuries are (still) bull-steepening post-CPI, while a lower UK CPI (core 0.3%MoM vs 0.5%MoM) and hawkish ECB & BoJ ‘sources’ and German debt-funding plans provide curve counter-weights (UK 2s -4.5bps, German 30y +8bps). Volumes remain lethargic by most metrics after yesterday’s rally pulled ~12mn/01 in new UST futures risk into the market (new longs, mostly in 2-7y space). Risk-assets by comparison remain a bit on the back-foot (DAX -0.7%, SPX fut’s -0.2%), while USD-crosses are close to home (save for JPY +0.5%). Franchises flow were difficult to source, but the trend post-CPI appears to be solid real$ engagement in front-end USTs, while fast$ were better sellers in OFTR/20y paper yesterday post-data.
… and for some MORE of the news you can use » IGMs Press Picks for today (14 DEC) to help weed thru the noise (some of which can be found over here at Finviz).
Now as far as few other items of interest, running through the WWW as well as the Global Wall St inbox … with (lower rate of)inflation all the rage …
First up from a fan fav stratEgerist (Ruskin) offering a game plan for,
For the last year, the front-end as measured by the 2y yield has seen higher yields on the day of every FOMC meeting. For the last four meetings, the S&P has also sold off, and the USD has a tendency to track stronger against G10 currencies.
The most important market moving elements of the meeting (the Powell Q&A; the 2023 dots; the 2023 inflation and unemployment forecasts) are prone to err hawkish, and if anything result in a small back-up in short-term rates again. However, the impact on the day will be restrained, mostly by the recent better inflation backdrop. While any immediate reaction may be less bond friendly, and more USD constructive, just getting the meeting out the way is prone to help bonds and impact the USD on more than a one day view.
Yardeni’s QUICKTAKE with a lovely picture of a PEAK
… The percent of small business owners with job openings fell to 44% during November. That’s down from a record high of 51% during May of this year. But it is still very high. This series closely tracks the job openings series included in the JOLTS report (chart). Fed officials have indicated that they would like to see fewer job openings to take the pressure off wages. Both series are heading in the right direction, but not fast enough. Indeed, a near record 28% of small business owners are planning to raise worker compensation.
Inflation: Is heading in the right direction, but it ain't over until its over.
Here are a few words from Nick Colas / DataTREK on FedFunds pricing after CPI and just ahead of the FOMC
An update on where Fed Funds Futures see the FOMC taking policy rates over the next 3 meetings as well as where this market now expects rates to be in December 2023. Today’s better than expected CPI report had a noticeable impact on this market.
Here are this market’s expectations for the next 3 meetings:
December 14th (tomorrow): the odds of a 50 basis point increase remain high (79 percent), although they were at similar levels yesterday (74 pct). If this proves correct, Fed Funds will end this year at 4.25 – 4.50 percent.
February 1st 2023: Futures now expect the Fed to most likely raise rates by 25 basis points at this meeting (53 percent odds, up from 35 pct yesterday). That is a notable shift in just 24 hours, all due to the CPI report. Yesterday, this market gave 51 percent odds of a 50 basis point bump, but the probability of that outcome is now 41 pct.
March 22 2023: Assuming a 25 basis point increase in February, Futures now put the highest odds (49 percent) on another 25 bp increase at this meeting. This would take Fed Funds to 4.75 – 5.00 percent. Yesterday, the highest odds (41 pct) were for policy rates to be 5.00 – 5.25 percent after this meeting.
Next, here is a CME FedWatch graph (link below) which shows the current odds for various Fed Funds rates at the end of 2023 along with our annotations showing how much those have changed in the last day:
Two points about this data:
Futures materially reset their expectations for year-end 2023 policy rates today. While the distribution of probabilities is still wide, it has shifted solidly to expecting lower rates in 12 months’ time than was the case yesterday. For example, the probability that Fed Funds would end next year above 4.75 percent fell by 18.6 percentage points today and the odds rates would be below 4.00 percent increased by 14.1 points.
This market is now discounting rate cuts at the end of 2023 (in November and December), bringing Fed Funds back to 4.25 – 4.50 percent. If that proves true, it would put the Funds rate right back to where it will most likely end this year.
Takeaway: Fed Funds Futures now see a sequence of 50, 25 and 25 basis point increases at the next 3 FOMC meetings, then a pause that lasts most of the year, and finally 2 rate cuts of 25 bps apiece to finish out 2023. As we wrote last night, markets will be looking for Chair Powell’s guidance on this new, more dovish forecast when he takes the podium tomorrow afternoon…
Ahead of the FOMC this afternoon, here are a couple visuals from MSs ‘charts that caught my eye’ (Katy Huberty — director of research)
And for something COMPLETELY different (ie NOT FOMC or CPI related, at least not DIRECTLY — when you start thinking of NEGATIVE REAL WAGES, this next one makes more sense)
Our US cards data suggest November retail sales growth of -0.2%, in line with consensus expectations, but a 0.2% control group gain. Unadjusted spending growth is solid in many categories, but not enough to generate positive growth after adjusting for seasonality.
… As you can see, the price of commodities (DBC) is dropping and recently broke below its 100 day moving average. At the same time, government bonds and junk bonds are moving higher and breaking above the 100 day moving average.
Taken together, it appears that inflation is chilling here. And, if so, this could be a boon for consumers …
… 10yr US Bond Yields are also still holding the entire 23.6% retracement of the entire 2020/22 upmove in yields at 3.39% and we still do not completely exclude a “neckline” retest at 3.735%. However, our view stays tactically bullish and we still view any backup in yields as temporary ahead a fall to test the 200-day average, currently at 3.11%.
This one seems appropriate to repost ahead of the FOMC,
