EGBS: ECB Hike Pricing Pared On Surprise GC Member Comments
ECB rate hike pricing has pulled back slightly following the publication of articles by Governing Council members Kazaks, Centeno, and Stournaras in Eurofi Magazine this morning. The timing of the release of these comments comes as a surprise - there is no date provided for their submissions but could have been prior to the week-long ECB "quiet period" going into Thursday's decision.
- Even so, since their comments began coming out on newswires, implied ECB hike pricing has dipped - it came in at 69bp for Thursday's meeting, but briefly dropped below 66bp. (Kazaks eyeing rates rising above neutral, but Stournaras "progressive" rate normalisation" and Centeno citing patience and "slow normalization consistent with inflation converging to target").
- This has helped support the short end of the German curve, with bull steepening (2s10s up 4bp, to steepest since Aug 25th).
- Even with ECB pricing pared back, BTP spreads are re-widening after flattening earlier in the session: 10Y/Bund last up 2bp at 240bp.
- See our ECB preview published Monday for more on the finely-balanced decision between a 50bp vs 75bp hike.
- Syndications of note today: France 20y OAT, Italy 2035 Green BTP; alongside Austrian RAGB and German ILB auctions.
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US TSYS: What Recession?
Rates trading weaker after the bell, just off midday session lows after FI markets gapped lower on stronger than expected jobs gains for July: +528k vs. +250k est, unemployment rate dropped a tenth to 3.5% after flattening out at 3.6% for six months. Average hourly earnings rose 0.5%, a tenth faster than in June. Better than expected data spurred heavy selling across the board but particularly in shorts to intermediates as yield curves extend inversion to new 22 year lows (2s10s -44.034).
- Heavy short end selling included 5Y Blocks as strong data spurs recession position unwinds as payrolls close gap with pre-pandemic levels, 75bp rate hike in September getting priced in again.
- Some faded the deep curve inversions w/ Block buying over 15,000 TUU2, 2s10s currently -5.686 at -41.947. Currently, 2-Yr yield is up 20.2bps at 3.2442%, 5-Yr is up 17.9bps at 2.9709%, 10-Yr is up 14.8bps at 2.836%, and 30-Yr is up 9.9bps at 3.0638%.
- Cross asset update: Stocks marginally lower/off lows (SPX eminis -15.0 at 4137.25 vs. 4104.25 low); Spot Gold weaker -16.10 at 1775.18; Crude weaker (WTI -0.39 at 88.15).
- Data: Slow start to next week, nothing scheduled for Monday except US Tsy bill auctions ($54B 13W, $42B 26W). Tuesday picks up with Nonfarm Productivity (-4.6% est) and Unit Labor Costs (9.8% est), US Tsy $34B 52W bill and $42B 3Y Note auctions.
US: Late Corporate Credit Update, Hold Narrow Range
Investment-grade corporate credit risk held near steady Friday as stocks see-sawed off post-jobs data lows. Currently, SPX eminis trade SPX eminis trade -21.5 (-0.52%) at 4131.75; DJIA -14.29 (-0.04%) at 32715.8; Nasdaq -121.6 (-1%) at 12599.4.
- Investment grade risk measured by Markit's CDXIG5 index +0.295 to 81.208; CDXHY5 high yield index at 101.366 (+0.137).
- Outperforming credit sectors (tighter or least wide): Materials (-2.0) followed by Senior and subordinated Financials (-1.7, -1.4 respectively), and Consumer Discretionary (-0.7)
- Lagging sectors (wider or least narrow): Communications (+0.8), Health Care (+0.4) followed by Technology and Industrials (+0.2).
US TSYS: Eurodollar/SOFR/ Tsy Options Roundup
Better buyers of FI puts in the latter half of the week made the right call as underlying futures came under heavy pressure early Friday after an unexpectedly strong July employment report. July jobs gained +528k vs. +250k est. while, unemployment rate dropped a tenth to 3.5% after flattening out at 3.6% for six months. Average hourly earnings rose 0.5%, a tenth faster than in June.
- Surge of selling in shorts to intermediates, yield curves extended inversion to new 22 year lows (2s10s -44.034) as pricing of another 75bp rate hike in September returned. Friday's option volume was rather disappointing, however, victim to summer trade malaise.
- Salient trade included +7,500 October SOFR 96.00/96.25 put spds 1.0 over 97.00 calls as well as a sale of -10,000 March'23 SOFR 98.25 calls .75 over 95.25/95.56/96.00 put flys. An early Eurodollar block post had -11,500 Mar 96.37/96.87 1x2 call spds, 5.0 vs. 11,500 Mar 95.50/96.00 2x1 put spds, 2.0. Meanwhile, Treasury options included +21,000 (7.5k blocked) FVV 111/111.75 put spds, 9.5.
