FED: US TSY 8W BILL AUCTION: HIGH 3.640%(ALLOT 31.85%)

• 1Y1Y SOFR has backed up to north of 4% as markets lean into a more hawkish Federal Reserve stance, which is firmly supporting the SFR M6/M7/M8 fly at lofty levels approaching 50bps with risks skewed higher.
• While today’s US Treasury market sell-off looks to be driven more by technicals, the recent batch of inflation beats against the backdrop of higher oil points to an under-priced Fed hike risk.
• The US economy has been resilient, raising questions around the neutral rate. Indeed, if the Fed keeps rates on hold for an extended period, it would likely be enough to push up the market’s estimate of the neutral interest rate.
• The next focus is tomorrow’s release of the April FOMC minutes. Markets will closely scrutinise the text, given that inter-meeting commentary has heavily emphasised rising risks to the inflation side of the dual mandate as potentially necessitating a change of approach. 

• This hawkish backdrop is reinforced by President Trump’s exclusive comments to the Washington Examiner today. By explicitly stating he will leave rate decisions up to incoming Fed Chair Kevin Warsh, Trump gives the new leadership political breathing room to lean into structural inflation pressures, further reducing the likelihood of a near-term dovish pivot.

  

"The UK Treasury is pushing large supermarkets to introduce voluntary price caps on key groceries in return for lifting some regulations, according to four people familiar with the situation."

• "Supermarkets have reacted furiously to the proposals, under which grocers would agree to identify and cap the prices of essential goods such as eggs, bread and milk."
• "In return, the government has said it would offer “incentives” to the supermarkets, which the people said could include easing packaging policies and potentially delaying costly changes to rules around healthy food."
• Full story here

Headlines from SOMA manager Perli via Reuters:

• "NY FED’S PERLI: ‘PLAUSIBLE’ PATH TO LOWER RESERVE LEVELS IS REGULATORY CHANGE"
• "NY FED’S PERLI: FED’S RATE CONTROL TOOLKIT HAS WORKED VERY WELL"
• "NY FED’S PERLI: FED LIQUIDITY MANAGEMENT HAS BEEN EFFECTIVE"
• "NY FED’S PERLI: FUTURE FED RESERVE MANAGEMENT BILL BUYING DRIVEN BY MARKET CONDITIONS"
• "NEW YORK FED'S PERLI: FED TOOLKIT CAN DEAL WITH CHANGING BANK RESERVE REGULATIONS"
• "NY FED’S PERLI: SHIFTING TO SCARCE RESERVE SYSTEM WOULD BE CHALLENGING"

On RMPs, a reminder that last week the NY Fed announced a further step down to $10bln/month (from $25bln in mid-April to mid-May and $40bln/month before that).