MNI ASIA OPEN: Markets Fade Weak PCE Data

EXECUTIVE SUMMARY

• FED'S HARKER: DON'T SEE INFLATION RUNNING OUT OF CONTROL, Bbg
• HARKER: HIGHER LONG-TERM RATES MAY REFLECT ECONOMIC OPTIMISM, Bbg
• Global bond rout not over, another sell-off likely before mid-year, Reuters poll
• Bank of Japan eyes shift to 'hands-off' approach on bond buying, Reuters
• Biden invites Russia, China to first global climate talks, PTI
• Chancellor Angela Merkel Sunday headlines threatening Federal control over tougher restrictions to curb the spread of pandemic

OVERNIGHT DATA: Weak Trimmed Mean Infl Suggests Fed Further Away From Goal

The Feb reading for core PCE prices - +1.4% Y/Y, down slightly from 1.5% in Jan - may belie an even bigger slowdown in price pressures in the month.

• The Dallas Fed's trimmed mean PCE metric, which excludes the most volatile price movements, continues to head lower: 1.61% on the 12-month reading (from 1.64% in Jan), and 1.37% on a 6-month annualized basis (1.44% in Jan). Those figures are the lowest since 2015, and compare to figures just above 1.9% seen as recently as September 2020. See chart below.
• While the test for higher inflation will come later in the year as the economy opens up from lockdown and fiscal stimulus comes through the pipeline, for the moment, price pressures are clearly headed downward.
• As ex-Atlanta Fed Pres Lockhart told our policy team back in January (see MNI EXCLUSIVE: Fed SEP Must Show Sustained Inflation For Hikes on Jan 29), FOMC members will be looking at such metrics as trimmed mean inflation to help determine whether they are getting closer to their inflation goal. On recent evidence, they are not.

MARKET SNAPSHOT

US TSY SUMMARY: Weak PCE Numbers Help Keep Yields Rangebound

Treasuries saw modest weakness Friday, with 10-Yr yields rising to firmly within the middle of the week's (1.5872-1.7051%) range after rebounding from 1.5% handles on Wednesday and Thursday.

• Curve steepening took a bit of a breather, with 5s30s retracing Thursday's sharp post-7Y auction rise. Indeed, the short and long end outperformed on the curve 2Y +0.2bps, 5Y +2.0bps, 10Y +2.7bps, 30Y +1.0bps.
• With no supply and limited Fed speaker activity (Philly Fed Pres Harker said on BBG TV that rising market yields were a "good sign because it shows optimism"), focus was on data.
• Tsys headed higher after personal income/spending data came in line for Feb, but with downside revisions to PCE inflation figures. Trimmed mean PCE inflation figures released later in the afternoon by the Dallas Fed confirmed that price pressures remain very weak. Less noticed, wholesale inventories data came in weak, leading to downward revisions to Q1 GDP 'nowcasts'.
• Even so, long-end breakevens led the charge at the long end, hitting new cycle highs for 10s as oil prices picked up pace.
• Next week's highlights are largely on the data side, with nonfarm payrolls Friday, and MNI Chicago PMI and ISM Manufacturing PMI providing a status check on economic activity.

MONTH-END EXTENSIONS: 

Forecast summary compared to the avg increase for prior year and the same time in 2020. TIPS 0.07Y; Govt inflation-linked, 0.02. Notice the bounce in US Tsy, Agency and MBS estimates, and drop in Credit extension est vs. last year.

US TSY FUTURES CLOSE:

3M10Y +4.281, 165.571 (L: 158.945 / H: 165.925)
2Y10Y +4.281, 153.338 (L: 148.04 / H: 153.944)
2Y30Y +2.126, 223.549 (L: 220.022 / H: 226.027)
5Y30Y -0.999, 151.13 (L: 150.45 / H: 154.343)
Current futures levels:
Jun 2Y down 0.375/32 at 110-13.125 (L: 110-12.875 / H: 110-13.875)
Jun 5Y down 6/32 at 123-27 (L: 123-25.25 / H: 124-01.25)
Jun 10Y down 12/32 at 131-24.5 (L: 131-20 / H: 132-04)
Jun 30Y down 23/32 at 155-31 (L: 155-10 / H: 156-19)
Jun Ultra 30Y down 31/32 at 183-16 (L: 182-05 / H: 184-09)

US EURODOLLAR FUTURES CLOSE:

Jun 21 steady at 99.830
Sep 21 steady at 99.810
Dec 21 steady at 99.745
Mar 22 steady at 99.785
Red Pack (Jun 22-Mar 23) -0.025 to -0.005
Green Pack (Jun 23-Mar 24) -0.045 to -0.035
Blue Pack (Jun 24-Mar 25) -0.06 to -0.045
Gold Pack (Jun 25-Mar 26) -0.06

Short Term Rates

US DOLLAR LIBOR: Latest settles:

• O/N -0.00212 at 0.07338% (-0.00350/wk)
• 1 Month -0.00188 to 0.10725% (-0.00113/wk)
• 3 Month +0.00600 to 0.19900% (+0.00212/wk) (Record Low of 0.17525% on 2/19/21)
• 6 Month -0.00063 to 0.20325% (+0.00087/wk)
• 1 Year +0.00000 to 0.28075% (+0.00450/wk)

• Daily Effective Fed Funds Rate: 0.07% volume: $78B
• Daily Overnight Bank Funding Rate: 0.07%, volume: $270B

• Secured Overnight Financing Rate (SOFR): 0.01%, $956B
• Broad General Collateral Rate (BGCR): 0.01%, $385B
• Tri-Party General Collateral Rate (TGCR): 0.01%, $351B
• (rate, volume levels reflect prior session)

• Fri 3/26 No buy operation
• Next scheduled purchases:
• Mon 3/29 1010-1030ET: Tsy 2.25Y-4.5Y, appr $8.825B
• Tue 3/30 1010-1030ET: TIPS 7.5Y-30Y, appr $1.225B
• Wed 3/31 1010-1030ET: Tsy 20Y-30Y, appr $1.750B
• Pause for Easter Holiday, Resume April 5:
• Mon 4/05 1100-1120ET: Tsy 0Y-2.25Y, appr $12.825B

FOREX: GBP Sees Support as EU & UK Seal FinReg Deal

• JPY retreated while AUD, NZD and NOK gained Friday as risk sentiment bounced after a tumultuous week. Equity markets looked to close the session with gains, draining recent strength from the greenback, which rolled off Thursday's multi-month high. JPY weakness put USD/JPY at new YTD highs, which equalled June 2020's best levels of 109.85.
• GBP saw some support ahead of the London close as Bloomberg reported that the EU and UK had sealed a deal over post-Brexit financial regulation. The piece reported that the move could allow UK financials firms to claw back some access to the Single Market that had been lost when the UK's transition period ended at the beginning of this year.
• GBP/USD climbed close to 1% off the week's lows, narrowing the gap with key resistance at the 1.3834 50-dma.
• The coming week is shortened due to Good Friday, although Nonfarm Payrolls is still scheduled for release. MNI Chicago Business Barometer and ISM data also cross. There are no central bank decisions of note.

EGBs-GILTS CASH CLOSE: Bunds And Gilts Fade At End Of Strong Week

Bunds and Gilts faded at the end of a strong week, with bear steepening in both curves as equities headed higher. Periphery spreads were flat/lower.

• Little in the way of impactful news flow, EU leaders pushed forward with some vaccine rollout plans while still appearing to mull its options on export limits.
• We saw a bit of a risk-on move in the afternoon on headlines that the UK and EU had reached a post-Brexit deal on financial services cooperation, but this was more of a framework than a firm deal. Also some headlines (but little reac) on Germany's top court temporarily delaying the country's participation in the pandemic recovery fund.
• Next week's holiday-shortened schedule includes Eurozone CPI and final PMIs (Italy and Spain watched for their readings), otherwise few speakers (ECB's Lane and Villeroy) and limited supply.

Closing yields/10-Yr Spreads to Bunds:

• Germany: The 2-Yr yield is up 0.1bps at -0.715%, 5-Yr is up 2.2bps at -0.676%, 10-Yr is up 3.8bps at -0.346%, and 30-Yr is up 4.1bps at 0.216%.
• UK: The 2-Yr yield is up 1.5bps at 0.061%, 5-Yr is up 1.7bps at 0.332%, 10-Yr is up 2.8bps at 0.757%, and 30-Yr is up 4bps at 1.282%.
• Italian BTP spread unchanged at 96.4bps/ Spanish spread down 1.3bps at 63.3bps