Fighting the last war
December 5, 2022
–NFP much stronger than expected 263k. with yoy Avg Hourly Earnings +5.1%. That’s what the Fed is fighting against, so rates jumped, but only short end rates remained higher by the end of the day as higher funding costs will stifle future economic activity. The weakest contract on the SOFR strip was June’23, DOWN 5.5 on the day to 9512.0, consistent with a terminal rate of 4.75-5.0%. However, SFRM4 closed UP 2 at 9654.5 and SFRM5 9718.5 +6.0. The rate on SFRM5 is more than 200 bps LOWER than the rate on SFRM3. Tens ended -2.4 bps at 3.504%, which is more than three-quarter percent below what will be the new repo rate when the Fed hikes 50 next week.
–Some near 1-yr calendars made new lows, the lowest being Sept’23/Sept’24 at -153.5. Red/green ED pack spread made a new historic low at -85.25. While weakness in front-end contracts suggests a stingy Fed, the near spreads between SOFR and ED contracts declined to new recent lows as LIBOR fades into its ultimate demise. For example, a month ago SFRZ2/EDZ2 traded 52.5, but settled Friday at 31.0. SFRH3/EDH3 closed at just 21.0. Libor rates used to signal credit concerns in the banking system, but the vast regulatory framework overseeing the financial architecture has become so robust that it’s hard to even imagine fraud or credit problems going undetected. On the other hand, I’ve heard there are some great values in Bahamas real estate. Speaking of which, here’s the subdial site, which tracks the prices of used watches. Down 5.4% over the past twelve months. Because, of course, you can now just look at your phone.
https://beta.subdial.co/market
