EURIBOR OPTIONS: M5 Call Spread Buyer

The Conference Board consumer survey suggested rising near-term inflation expectations in April, alongside an uptick in interest rate expectations and weaker equities.

• It showed 1Y average expectations rising to 7.0%, up 1ppt from April for the highest since November 2022 (the Conference Board's survey only asks about 12-month ahead expectations). For comparison, the pre-pandemic decade average was 5.1%, so this may overstate the "actual" level of CPI expected. The median expectation was 6.0%, up 1.1ppt from March and likewise a post-Nov 2022 high.
• This was more or less in line with the 1Y UMichigan multi-decade high reading of 6.5% (up 1.5pp from Mar). That was less benign than the Conference Board's in relative terms (UMich 1Y inflation averaged 2.9% in the decade pre-pandemic).
• But clearly there has been a continued uptick in expectations, and we await the April data from the NY Fed's survey out on May 8.
• Higher inflation expectations may help explain why consumers see fewer interest rate cuts ahead. The differential between those seeing interest rates higher in 12 months (56.1%) minus lower (21.4%) was the highest (34.7pp) in 11 months (was 12.2pp at Sep 2024's 50 month low, coinciding with the Fed's 50bp cut to start the easing cycle). Note that this is still not a particularly high reading - as the chart below suggests, consumers rarely if ever see rates going lower as opposed to higher.
• In another gauge of sentiment, though potentially a contrarian one that tends to be more backward looking, the % seeing stocks higher vs lower in 12 months fell to -12.4pp, lowest since September 2022 (which proved to be the start of a prolonged rise in equities).

Comments from Bank of Greece Governor Stournaras, via BBG:

• “Markets are pricing in further reductions, but I believe that we should be cautious due to the very high uncertainty that prevails,”
• The deposit rate — currently 2.25% — is expected to be decreased to 2%, he said. That would mean just one more quarter-point move by the ECB, whereas investors are pricing two or three more of that size by year-end.

A little more cautious on the idea of cuts below 2% than some may have expected - Stournaras is one of the most dovish members of the Governing Council. There wass little material reaction in ECB-dated OIS rates to the comments - July implied rates have risen ~0.5bps. ECB-dated OIS continue to fully price a 25bp cut through June, with 13.5bps of sequential easing priced through July.

The latest MNI Policy Team sources piece, released this afternoon, explored the lively debate amongst the Governing Council ahead of the June decision.

Upside call volume gaining as underlying futures see-saw near midmorning highs (TYM5 +7.5 at 112-04.5). Curves mildly steeper (2s10s +.183 at 51.117). Projected rate cut pricing rising in the second half of the year compared to this morning's levels (*) as follows: May'25 steady at -2.3bp, Jun'25 at -16.3bp (-16.9bp), Jul'25 at -38.6bp (-37.6bp), Sep'25 -60.5bp (-57.4bp).

• SOFR options:
  • -15,000 SFRN5/0QN5 96.12/96.25 call spd spd, 1.25 net steepener
  • +10,000 SFRZ5 96.75/97.25 call spds, 14.25 ref 96.645
  • -8,000 0QM5 96.87/97.00/97.25/97.3 call condors, 2.87 ref 96.98
  • +2,500 0QM5 97.50/98.00/1000 2x3x1 call flys 7.0 vs. 96.365/0.14%
• Treasury Options:
  • +15,000 wk2 TY 112.75 calls, 21