Brainiacs
May 19, 2023
–Lorie Logan yesterday (Dallas Fed President and former head of the NY Markets desk).
“The data in coming weeks could yet show that it is appropriate to skip a meeting. As of today, though, we aren’t there yet.”
–August Fed Funds (FFQ3) closed down 6.5 at 9485.5 or 5.145% vs current EFFR of 5.08, while FFN3 settled 9484.0. SFRU4 led the decline, closing at 9661.5, down 18 on the day. Several Fed speakers (Mester, Bullard, Barkin, Logan) have indicated that a pause is not necessarily in the cards. Weakness in nearer contracts reflects that sentiment; the ‘pivot’ is being less aggressively priced and slightly pushed forward in time. New lows in one-year spreads M4/M5 at -68 (9630/96.98; -3 on the day) and U4/U5 at -38 (9661.5/9699.5, -5.5 on the day)… moving a bit farther back. SFRM3/U3 hit a new recent high of -21 as SFRU3 has sold off and is converging toward the current FF target. SFRU3 settled yesterday at 9502, more than 100 bps lower than the highs registered during the SVB fiasco (high settle on 3/15 was 9598.5 while the high tick was 9647.5).
–Against this backdrop Powell and Bernanke speak today and will likely repeat the paternalistic mantra that the banking system is ‘sound and resilient’ and that the Fed will not stop until it’s sure that the scourge of inflation has been vanquished. Is there irony in an environment where money is pouring into a few big tech stocks associated with Artificial Intelligence, thus masking weakness across the broader equity landscape, while at the same time the brain trust of the Fed discusses inflation? With apologies to Jules, “Check out the big brain on Ben”. After all, Bernanke, in a tenacious effort to fight deflation, stoked the embers that led to the current fire.
–The Fed’s balance sheet, having temporarily blown up in March as banking problems flared, is back below $8.5 trillion. Attached chart shows balance sheet and SPX. The good news is that the debt-ceiling is being raised, the bad news is that t-bill issuance is going to drain liquidity to replenish the TGA. Eleven months ago, at the June 15, 2022 FOMC, the committee decided to raise the FF target to 1.5-1.75%. They talk about policy having an effect 6-12 months after the initial moves. 3.5% of the rate hikes have been in that window.
