Rates

Short-Term Inflation Expectations Dropped Today With ECI Print Lower Than Estimates

Forward short rates fell further and the USD OIS curve now only prices in a 50% chance of a 25bp Fed hike before the end of 2022, down from 90% after the June FOMC

Published ET

Implied Fed Hikes Derived From The 3-Month USD OIS Forward Curve | Sources: ϕpost, Refinitiv data

Implied Fed Hikes Derived From The 3-Month USD OIS Forward Curve | Sources: ϕpost, Refinitiv data

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QUICK US SUMMARY

  • 3-Month USD LIBOR -0.8bp today, now at 0.1178%
  • The treasury yield curve flattened, with the 1s10s spread tightening -4.0 bp, now at 116.0 bp (YTD change: +35.5bp)
  • 1Y: 0.0660% (unchanged)
  • 2Y: 0.1878% (down 1.6 bp)
  • 5Y: 0.6935% (down 3.8 bp)
  • 7Y: 1.0000% (down 2.3 bp)
  • 10Y: 1.2256% (down 4.0 bp)
  • 30Y: 1.8948% (down 2.3 bp)
  • US treasury curve spreads: 2s5s at 50.6bp (down -2.3bp), 5s10s at 53.2bp (down -0.2bp), 10s30s at 66.9bp (up 1.8bp today)
  • Treasuries butterfly spreads: 2s5s10s at 2.3bp (up 2.1bp today), 5s10s30s at 13.5bp (up 2.2bp)
  • US 5-Year TIPS Real Yield: -1.1 bp at -1.9620%; 10-Year TIPS Real Yield: -2.6 bp at -1.1740%; 30-Year TIPS Real Yield: +0.3 bp at -0.3480%

US MACRO RELEASES

  • 1 Year Inflation Expectations (median) for Jul 2021 (UMICH, Survey) at 4.70 %
  • Change P/P for Jun 2021 (BEA, US Dept. Of Com) at 0.10 %, above consensus estimate of -0.30 %
  • Chicago PMI, Total Business Barometer for Jul 2021 (MNI Indicators) at 73.40 , above consensus estimate of 64.60
  • Labor Cost, Employment cost index, benefit costs, Change P/P for Q2 2021 (BLS, U.S Dep. Of Lab) at 0.40 %
  • Labor Cost, Employment cost index, total compensation, Change P/P for Q2 2021 (BLS, U.S Dep. Of Lab) at 0.70 %, below consensus estimate of 0.90 %
  • Labor Cost, Employment cost index, wages and salaries, Change P/P for Q2 2021 (BLS, U.S Dep. Of Lab) at 0.90 %
  • Personal Consumption Expenditure, Change P/P for Jun 2021 (BEA, US Dept. Of Com) at 0.50 %
  • Personal Consumption Expenditure, Change P/P for Jun 2021 (BEA, US Dept. Of Com) at 0.50 %
  • Personal Consumption Expenditure, Change P/P for Jun 2021 (BEA, US Dept. Of Com) at 1.00 %, above consensus estimate of 0.70 %
  • Personal Consumption Expenditure, Change Y/Y for Jun 2021 (BEA, US Dept. Of Com) at 4.00 %
  • Personal Consumption Expenditure, Personal consumption expenditures less food and energy, Change P/P for Jun 2021 (BEA, US Dept. Of Com) at 0.40 %, below consensus estimate of 0.60 %
  • Personal Consumption Expenditure, Personal consumption expenditures less food and energy, Change Y/Y for Jun 2021 (BEA, US Dept. Of Com) at 3.50 %, below consensus estimate of 3.70 %
  • Personal Consumption Expenditure, Total, trimmed mean inflation rate (1-month annualized), Change M/M for Jun 2021 (Fed Reserve, Dallas) at 2.30 %
  • University of Michigan, 5 Year Inflation Expectations (median), Change Y/Y for Jul 2021 (UMICH, Survey) at 2.80 %
  • University of Michigan, Consumer Expectations Index, Volume Index for Jul 2021 (UMICH, Survey) at 79.00
  • University of Michigan, Consumer Sentiment Index, Volume Index for Jul 2021 (UMICH, Survey) at 81.20, above consensus estimate of 80.80
  • University of Michigan, Current Conditions Index, Volume Index for Jul 2021 (UMICH, Survey) at 84.50

WEEKLY CFTC SPECULATIVE POSITIONING UPDATE

  • Specs were buyers of duration across the curve in the latest week, reducing their net short position in the process
  • Leveraged funds extended their net short position, mostly shorting the long end of the curve, with a clear steepening bias
  • Here's a Credit Suisse summary:

Source: Credit Suisse

US Rates Intraday | Sources: ϕpost, Refinitiv dataUS Curve Spreads Intraday | Sources: ϕpost, Refinitiv data

US FORWARD RATES

  • US Treasury 1-year zero-coupon rate 5 years forward down 4.3 bp, now at 1.6505%
  • 1-Year Treasury rates are now expected to increase by 157.5 bp over the next 5 years (down from >250bp in March)
  • 3-month Eurodollar futures expected hike of 13.7 bp by the end of 2022 (meaning the market prices 54.8% chance of a 25bp hike by end of 2022)
  • The 3-month USD OIS forward curve prices in 12.6 bp of rate hikes over the next 18 months (equivalent to 0.50 rate hike) and 69.7 bp over the next 3 years (equivalent to 2.79 rate hikes)
Expected Changes In US 1Y Treasury Rate | Sources: ϕpost, Refinitiv data Expected Timing Of Fed Hikes | Sources: ϕpost, Refinitiv data

US INFLATION & REAL RATES

  • TIPS 1Y breakeven inflation at 3.36% (down -12.8bp); 2Y at 3.02% (down -4.1bp); 5Y at 2.73% (down -3.0bp); 10Y at 2.40% (down -1.4bp); 30Y at 2.26% (down -2.6bp)
  • 6-month spot US CPI swap down -6.9 bp to 4.558%, with a flattening of the forward curve
  • US Real Rates: 5Y at -1.9620%, -1.1 bp today; 10Y at -1.1740%, -2.6 bp today; 30Y at -0.3480%, +0.3 bp today
6-Month Inflation Swap Spot & Forward | Sources: ϕpost, Refinitiv dataUS TIPS Real Yields | Sources: ϕpost, Refinitiv data

RATES VOLATILITY & LIQUIDITY

  • USD swap rate implied volatility (USD 1 Month by 1 Year ATM Swaption) up 0.2% at 14.9%
  • 3-Month LIBOR-OIS spread down -0.7 bp at 4.0 bp (12-months range: 3.7-22.0 bp)
US STIR Volatility | Sources: ϕpost, Refinitiv data3-month USD LIBOR-OIS Spread | Sources: ϕpost, Refinitiv data

KEY INTERNATIONAL RATES

  • Germany 5Y: -0.737% (down -0.4 bp); the German 1Y-10Y curve is 1.2 bp flatter at 18.7bp (YTD change: +3.4 bp)
  • Japan 5Y: -0.123% (unchanged 0.0 bp); the Japanese 1Y-10Y curve is 0.1 bp flatter at 14.8bp (YTD change: +0.5 bp)
  • China 5Y: 2.673% (down -4.5 bp); the Chinese 1Y-10Y curve is 2.0 bp flatter at 88.5bp (YTD change: +42.1 bp)
  • Switzerland 5Y: -0.684% (down -0.9 bp); the Swiss 1Y-10Y curve is 1.3 bp flatter at 38.6bp (YTD change: +7.2 bp)
US DE CN JP Hikes Expectations | Sources: ϕpost, Refinitiv dataGlobal Expected Hikes | Sources: ϕpost, Refinitiv data