STIR: Westpac: The Market Will Maintain A Degree Of Front-Loading For RBA Policy
Westpac note that “it is well known that a number of markets have responded to the historical levels of inflation by factoring in an aggressive and “front-loaded” tightening cycle. RBA and Fed pricing are no exceptions, with the market factoring terminal rates of a round 3.25% for both central banks in 2023. That is at the upper end of the hawkish range for most forecasters but reflects the uncertainties and risks around inflation expectations as a result of these unusual global and domestic circumstances. The peak in the RBA pricing is ~100bp higher than Westpac’s forecast terminal rate, while the peak in the Fed’s is ~37.5bp above our terminal expectations. That suggests that there might be scope for a bullish correction to the RBA policy profile at some stage. But when? In our view, the RBA should deliver a 40bp hike in June. The market is only aspiring a 20% chance of that occurring. That is consistent with the RBA’s “BAU” messaging and confidence they have more meetings to get the settings right than other central banks. However, if they were to deliver the larger hike earlier, then we expect that would be a significant signal and remove some of the pricing for higher than 25bp hikes in the meetings beyond that. There is around a 40bp hike factored-in to October and between 25-40bp for each meeting in 2022. For most meetings, that is at the lower end of recent expectations, where we think they will stay for now and even beyond the June meeting if the RBA decides to deliver a 25bp hike.”
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US TSY FUTURES: BLOCK, Late 2s/10s Steepener
Underscoring the bounce in 2s10s off earlier lows:
- +10,000 TUM2 105-10.12 post-time offer at 1606:05ET vs.
- -5,450 TYM2 118-30, sell through 118-31.5 post-time bid
US TSYS: Cleveland Fed Mester Pushes Back on 75Bp May Hike, Favors 50Bp
Rates trade modestly higher after the bell, recovering a portion of Thursday's sell-off. Bonds see-sawed +/- a few ticks around steady in early trade before making session highs around 1000ET, 30YY slipped to 2.8850% before climbing and holding a range from noon on around 2.9470%.
- Short end rates were under pressure for much of the session recovered slightly after the bell as Cleveland Fed Mester pushed back on any need for 75bps hike at May 4 FOMC, in favor of 50bp moves.
- Curves bounced off flatter levels: After tapping 42.0 ahead Mon's open, 2s10s fell to 14.108 low in the first half as markets price in the off chance of 75bp hike at the May 4 FOMC. Bbg noted Fed Swaps priced in 250bp in hikes by year end.
- Nomura analysts anticipate the Fed to make two consecutive 75bp hikes (June and July) after a 50bp hike on May 4:
- "For some time, our view has been that if the Fed could hike 200bp at one meeting without significantly affecting market functioning, they would. So far, markets have been reluctant to price 75bp hikes, but stronger pricing for such a move would likely ease the path for the FOMC and participants could likely forge a consensus on such action quickly".
- Fed enters Policy blackout at midnight tonight.
US TSYS: Eurodollar/Tsy Option Roundup
Gyrations in underlying FI futures Friday spurred buyers of wing insurance (low delta calls and puts), challenging environment for active traders. Bonds see-sawed around steady before rallying around midmorning, curves flattening with short end rates underperforming all session.
- Bonds trimmed gains by noon, holding to a narrow range while the short end pared losses after Cleveland Fed President Mester pushed back on any need to hike 75 bp at the May 4 FOMC in an interview on CNBC after the close. Note, lead quarterly Eurodollar futures EDM2 traded 98.11 (-0.065) after the bell vs. 98.050 session low.
- Salient Eurodollar trade included a buy of 5,000 Sep 97.75/98.00/98.25/98.50 call condors after block buy +10,000 Sep 96.00 puts, 7.0 ref 97.275.
- Treasury options saw decent 5Y volumes with 12,000 FVM 113/114 1x2 call spds at 5.5 and over 22,000 FVM 114 calls, 12.5-13. Early Blocks: total 25,000 FVM 111.5 puts, 34.5 vs. 15,000 FVM 112.5 puts, 62.
