Inversion Deepens With Potential 100bp Hike Eyed

TUU2 operates around late NY levels, after going out a touch shy of best levels on Wednesday.

• To recap, CPI provided upside surprises across the board, with the shelter component seemingly providing the most notable source of upside impetus. Nomura were the first major sell-side name to project a 100bp Fed hike later this month, while Atlanta Fed President Bostic (’24 voter) noted that the report was concerning, putting “everything in play” when questioned on the prospect of a 100bp hike later this month. Elsewhere, Richmond Fed President Barkin (’24 voter) noted that inflation is too high, while underling the “short-term recession risk” that the U.S. economy currently faces. FOMC-dated OIS now price in 90bp of tightening for the upcoming FOMC meeting.
• The Tsy curve twist flattened (near-term hike pricing increased,, with cut expectations/recession worry supporting the longer end after the post-CPI cheapening, dragging the space off cheaps), pivoting around the 5- to 7-Year zone, with 2s leading the cheapeneing in the front end (to the tune of 10bp), while 30s led the richening in the long end (to the tune of 5bp). When it comes to degrees of curve inversion various measures hit cycle extremes, including the 2-/10-Year yield spread, EDZ2/H3, EDZ2/Z3 & EDZ2/Z4. Note that Fed Chair Powell’s preferred monitor the 3-month/3-month 18 months forward spread now sits around the 70bp mark, after flattening by ~150bp over the last month.
• A solid round of 30-Year Tsy supply helped the long end to richen further, with the auction stopping through WI by 1.8bp, while the cover ratio ticked higher (a little above the 6-auction average) as dealer takedown hit a record low.
• Note that the BoC delivered a surprise 100bp rate hike (wider expectations looked for a 75bp move), although that had little net impact on Tsys, given the post-CPI dynamic.
• Comments from Fed’s Mester (’22 voter) headline today’s Asia-Pac docket (she is set to start speaking on BBG TV at 23:20 London, per the BBG live schedule), with the Australian labour market report headlining the regional data docket. Thursday’s NY session will bring PPI data and the weekly jobless claims readings. Elsewhere, Fed Governor Waller is set to speak re: the economic outlook.