Weekly Macro Summary: Seismic Shift In ECB Policy, Market Repricing Brought Considerable Realized Volatility In Euros Over The Past Days
Very strong US employment report today raised the likelihood of a 50bp Fed hike in March (now 35 bp priced into Fed Funds futures), showed the Fed is likely well behind the curve
Published ET
US TIPS 5s30s SPREAD GOING SIDEWAYS, REFLECTING UNCLEAR LONGER-TERM GROWTH EXPECTATIONS | Sources: ϕpost, Refinitiv data
TLDR VERSION
- Rates up at the front end, curves flatter
- Specs and leveraged funds pare short duration trade
- ECB turning hawkish, EUR-USD rates differentials tighten, drive huge jump in euro realized volatility
- Brent and WTI now trading well above $90/bbl at the front end of the curve, with backwardation at or close to historical highs (depending on forward period). With little relief in sight on the supply side (except for a possible Iranian deal), it's hard to short the front end outright. But calendar spreads should mean revert materially lower over the next year
LONGER VERSION, IN CHARTS
1 YEAR FORWARD INFLATION EXPECTATIONS STILL RISING IN THE US, EUROPE
US TIPS INFLATION BREAKEVENS RISE AT THE FRONT END, FALL FURTHER DOWN THE CURVE
THE STEEP RISE AT THE FRONT END OF THE US YIELD CURVE IS DRIVEN BY FED'S INFLATION FEARS
US TREASURIES 2S10S SPREAD ENDS WEAKER AFTER SLIGHT BOUNCE
SPECS, LEVERAGED FUNDS REDUCE NET SHORT DURATION POSITIONING
MARKET PRICING GETTING CLOSER TO 50 BP FOR MARCH FOMC
MARKET REALIZES 6 HIKES BY THE END OF THE YEAR QUITE POSSIBLE IF QT NOT USED OFFENSIVELY
EURODOLLAR FUTURES STILL SEE VERY FRONT-LOADED, SHALLOW HIKING CYCLE, WITH JUST 2 HIKES PRICED FOR 2023, NONE IN 2024
US RATES IMPLIED VOLATILITY STAYS EXTREMELY HIGH, REFLECTS UNCERTAIN ("NIMBLE") POLICY PATH CHOSEN BY THE FED
EURO FX GAINS OVER 2% THIS WEEK..
..ON THE BACK OF TIGHTER FORWARD RATES DIFFERENTIAL
THE SIZE OF THE MOVE IS BEST SEEN IN THE SKEW OF EURO 1-MONTH 10-DELTA RISK REVERSALS
US DOLLAR INDEX, DX IMPLIED VOLATILITY FALL
GBP FORWARD RATES CURVE DEEPLY INVERTED, MARKET KEEPS PRICING POLICY ERROR
CDX EM SOVEREIGN CREDIT SPREAD WIDENS..
..BUT EM CURRENCIES HAVE HELD UP PRETTY WELL SO FAR
COMMODITY PRICES HELPING EM FX, WITH THE S&P GSCI EQUAL-WEIGHTED INDEX STILL RISING
ENERGY LEADING THE RISE IN COMMODITIES THIS WEEK..
... AND THIS YEAR
ENERGY RISE IS BROAD BASED
BRENT FRONT MONTH PRICES WELL ABOVE $90/BBL, THOUGH BACKWARDATION AT HISTORICALLY HIGH LEVELS
BASE METALS MIXED, LED BY NICKEL
AGS LED BY SOYBEANS AND COCOA
