4.5 to 4.75%
November 29, 2022
–Large buyer >60k EDZ2 9512.5/9531.25 cs 2.5 up to 3.0. Settled 3.0 (3.5/0.5) ref 9506.25. SFRZ2/EDZ2 has collapsed since the start of the month, from 52.5 down to 36.5 at Monday settle. So turn-of-year pressure has been alleviated (extra liquidity reaching the markets?). Three month libor currently 4.73486 (9526.5) with 16 days until FOMC, when EFFR will shift to 433 bps on a 50 bp hike. FFF3 settled 9562.0 or 438. FFG3 will capture the Feb 1 FOMC result and is 9524.0, a spread of 38 over January. If yoy Core PCE prices print a 4 handle (Thursday) and NFP is weak (Friday), could the Feb FOMC gravitate to hike of just 25? (which would cause FFG3 to trade over 9540). If so, inversion from 2’s back would likely lessen.
–Both Williams and Bullard yesterday indicated more hiking to come, with Bullard saying the markets could be underpricing risks of more aggressive Fed tightening. Powell speaks tomorrow. Does EFFR have to be greater than Core PCE prices to fit the definition of “restrictive”? It’s possible that EFFR could be 458 by February (50 in Dec, 25 in Feb) and Core PCE around 4.5 – 4.7. Williams expects the jobless rate to climb to 4.5 to 5.0% by late 2023. Perhaps Core PCE, FF target and Unemployment will all be 4.5-4.75 by 2H 2023.
