Fast hikes, slow ease. Isn’t that backwards?
October 17, 2023
–Today’s news includes Retail Sales, expected 0.3% from 0.6 last. Ex-auto and gas 0.1% vs 0.2%. Industrial Production 0.0 from +0.4%.
–New high Monday in SFRH4/SFRH5 one-year calendar at -95.5 (9464.5/95.60) up 3.5 on the day. This is currently the most inverted 1-yr on the curve. In early Sept the 1-yr spreads were around -120 to -130. There are now no spreads implying more than four 25 bp eases over a given year. The Fed has successfully tamped expectations of aggressive easing out of the market even as many officials have signaled a November skip (yesterday Harker again said that the Fed is likely done with hikes). Today, Williams, Bowman, Barkin and Kashkari. Bowman said last week that more hikes might be necessary, but the majority of speakers suggest a wait-and-see approach. From July 2022 to July 2023 the Fed hiked 300 bps from 2.25-2.5 to 5.25-5.5. Current spread pricing implies comparatively glacial easing. However, out of the money calls still reflect a high cost to insure against rapid easing. For example, SFRH4 9662.5 calls, just five months until expiration and 200 bps out-of-the-money, settled 4.5.
–Twenty year auction is tomorrow. At the time of futures settle, cash 2y was 5.094% and 20y wi was 5.08/5.075. 20y will likely become the highest point on the curve. Ten-year yesterday 4.708 (+8.1 bps) and 30y 4.863 (+8.6) as flight to quality bids unwound.
