A soft, easy hike
May 25, 2023
I left a good job in the city
Working for the man every night and day
-Tina Turner Proud Mary
–Jobless Claims today expected 245k. 7yr auction. As Waller said yesterday, the labor market remains tight and inflation is stubbornly high, but credit conditions are a wild card which could lead to a skip in June. My sense is that the Fed is likely to skip, but to continue to jawbone that hikes are needed, which will have the effect of bringing forward SOFR contracts nearer to the current FF rate. In a way, that strategy serves as a “soft hike” and buys time. SFRZ3 (weakest contract) fell another 8.5 bps yesterday to 9523 or 4.77 vs EFFR of 5.08%, while SFRH4 fell 8 to 9570.5.
On Friday, we will be getting April inflation data based on personal consumption expenditures and then May CPI data on the first day of the FOMC meeting. These are two critical pieces of data I will be looking at between now and the June FOMC meeting to learn more about inflation dynamics and if we are seeing some easing in inflation pressures. (Waller)
https://www.federalreserve.gov/newsevents/speech/waller20230524a.htm
–Good news, bad news: NDVA exploded after hours on earnings and outlook, adding >$150b to market cap, while the US is looking at a credit downgrade by Fitch as debt ceiling talks drag on.
–UK CPI yesterday was +8.7% vs estimate of 8.2%. Huge drop in SONIA contracts with Dec3, March4 and June4 atll down 33 bps (9463, 9477, 9498). BOE’s Huw Pill was right, “British people need to accept they are poorer.” from April 25. In SOFR, new high in M3/U3 at -14.75 and in U3/Z3 at -34.5 as back contracts converge toward front. SFRZ3/Z4 new recent low at -152; the lowest settle in this particular one-yr calendar was -158.5 just before SVB. The most inverted one-year spread remains SFRU3/U4 at -162. Forward easing has been pushed back a little but is still being priced.
