US OUTLOOK

• Although 2Q real GDP growth was negative again, all but one of the data series followed by the NBER (to determine recessions) are still growing

• The Fed recognizes that a weakening in the economy is necessary to prevent inflation from becoming anchored; in particular, its sense of urgency to contain wage inflation is not diminished
• Credit Suisse: "The Employment Cost Index rose 1.3% QoQ in 2Q. Wages and salaries (about 70% of total compensation) accelerated to 1.4% from 1.2% QoQ. This was the largest quarterly wage gain in the ECI since 1982. "

• What that means is that the market might have misunderstood the Fed pivot: pricing in 3 rate cuts in 2023, when core inflation is forecast to average over 4%, is not reasonable. The notion that the Fed will tolerate that kind of inflation to prevent a recession sounds like a very risky base case: in our opinion, forward rates will reprice higher.

• Wells Fargo economists: "The Fed is far from containing inflation. Because wage inflation is highly persistent, and impacts the economy broadly, this means in order to get overall inflation back down to 2% the Fed must tighten monetary policy much more than what consensus is looking for in order to increase the unemployment rate materially from the current sticky 3.6% cycle low level."

WEEKLY US RATES SUMMARY

• The treasury yield curve flattened, with the 1s10s spread tightening -4.9 bp, now at -29.1 bp (YTD change: -142.3bp)
• 1Y: 2.9478% (down 4.6 bp)
• 2Y: 2.8885% (down 8.2 bp)
• 5Y: 2.6803% (down 16.6 bp)
• 7Y: 2.6879% (down 14.7 bp)
• 10Y: 2.6568% (down 9.5 bp)
• 30Y: 3.0110% (up 3.7 bp)
• US treasury curve spreads: 3m2Y at 52.4bp (down -1.9bp this week), 2s5s at -20.8bp (down -8.4bp), 5s10s at -2.4bp (up 7.3bp), 10s30s at 35.4bp (up 13.4bp)
• US TIPS 1Y breakeven inflation at 3.78% (up 28.6bp); 2Y at 3.32% (up 27.9bp); 5Y at 2.86% (up 24.4bp); 10Y at 2.55% (up 22.6bp); 30Y at 2.31% (up 7.2bp)
• US 5-Year TIPS Real Yield: -38.0 bp at -0.0900%; 10-Year TIPS Real Yield: -30.2 bp at 0.1140%; 30-Year TIPS Real Yield: -9.3 bp at 0.7310%

US ECON RELEASES IN THE PAST WEEK

WEEKLY CFTC NET DURATION POSITIONING DATA

US ECON RELEASES IN THE WEEK AHEAD

• The Employment Report and ISM manufacturing will be the most important data points next week

FED SPEAKERS IN THE WEEK AHEAD

• Tuesday 10:00AM: Chicago Fed President Evans
• Tuesday 1:00PM: Cleveland Fed President Mester
• Tuesday 6:45PM: St. Louis Fed President Bullard
• Thursday 12:00PM: Cleveland Fed President Mester

US FORWARD RATES

• Fed Funds futures now price in 57.5bp of Fed hikes by the end of September 2022, 86.4bp (3.5 x 25bp hikes) by the end of November 2022, and 3.9 hikes by the end of December 2022
• 3-month Eurodollar futures (EDZ) spreads price in -77.0 bp of hikes in 2023 (equivalent to -3.1 x 25 bp hikes), down -4.0 bp today, and -43.5 bp of hikes in 2024 (equivalent to -1.7 x 25 bp hikes)

US INFLATION & REAL RATES

• TIPS 1Y breakeven inflation at 3.78% (up 6.6bp); 2Y at 3.32% (up 4.7bp); 5Y at 2.86% (up 8.0bp); 10Y at 2.55% (up 5.4bp); 30Y at 2.31% (up 2.7bp)
• 6-month spot US CPI swap down -6.7 bp to 5.372%, with a flattening of the forward curve
• US Real Rates: 5Y at -0.0900%, -8.2 bp today; 10Y at 0.1140%, -6.6 bp today; 30Y at 0.7310%, -3.0 bp today

RATES VOLATILITY & LIQUIDITY

• USD swap rate implied volatility (USD 1 Month by 1 Year ATM Swaption) down -3.3 vols at 143.5 normals
• 3-Month LIBOR-OIS spread down -0.1 bp at 19.5 bp (18-months range: -6.0 to 39.3 bp)

KEY INTERNATIONAL RATES

• Germany 5Y: 0.542% (up 2.1 bp); the German 1Y-10Y curve is 2.3 bp steeper at 45.1bp (YTD change: -43.2 bp)
• Japan 5Y: -0.016% (down -1.6 bp); the Japanese 1Y-10Y curve is 2.1 bp flatter at 32.4bp (YTD change: -15.9 bp)
• China 5Y: 2.506% (down -3.8 bp); the Chinese 1Y-10Y curve is 0.9 bp flatter at 105.4bp (YTD change: -49.9 bp)
• Switzerland 5Y: 0.124% (up 4.5 bp); the Swiss 1Y-10Y curve is 3.3 bp steeper at -4.0bp (YTD change: -56.6 bp)