Beware the ides
March 15, 2023
–Front end reverting back to lower levels as deposit guarantees remove immediate domino concerns. On Monday morning SFRM3 put in a high of 9582. It settled Tuesday at 9533.5 and this morning printed 9504.0. There has been some massive buying of April expiration puts on SFRM3. For example, +60k SFRJ 9525/9487.5ps for 11-12.5 (settle 16; appears to be roll-up). +30k April 9468.75p 9-10 covered 9526. +50k May 9550/9500 p 1×2 for 1.5-2.0, settled 1.25. This morning +60k April 9475p 13-14 covered 9524.
–On March 7, the atm SFRM3 9437.5^ settled 33.5. Yesterday the atm 9537.5^ settled 93 vs 9533.5. In terms of next week’s FOMC, a hike of 25 now appears to be base case, as FFJ3 settled 9524.5. EFFR is 457 to 458, a hike of 25 would mean 482 to 483 or 9517.5 at the midpoint.
–CPI was as expected, 6.0 with Core 5.5. Today PPI is released, expected 5.4 vs 6.0 last, with Core 5.2 vs 5.4. The funding crunch and mismatch experienced by SVB is impacting many companies, but the Fed has to make sure that emergency actions don’t unmoor inflation expectations. The absolute level of short-term rates isn’t the issue at this point; we know they are hurting. It’s getting harder to roll debt. The message has to be that easing is simply not on the near term horizon.
BELOW…is a link from the NY Fed from January 17, noting (and mostly dismissing) the rise in Discount Window borrowing from smaller banks. Perhaps that was a bigger clue than acknowledged?
