Near term policy path more certain

September 9, 2022

–USD weakening this morning, giving a boost to commodities, precious metals.  ECB hiked 75 yesterday and Lagarde said there’s more to come, though 75 bp moves are “not the norm.”  Powell repeated his pledge for price stability.  US markets have solidified expectations for 75bps on Sept 21.  Oct Fed Funds settled 9695.0, down 2.5 bps.  Current EFFR is 233, so a 75 hike means 308, or an Oct FF price of 9692.  The Oct/Nov FF spread settled 47.5, so we’re close to pricing another 50 at the Nov 2 FOMC (FFX2 settled 9647.5 or just over 3.5%).  Could CPI on Tuesday flip expectations back to the possibility of 50?  Probably not at this point.  EDU2/EDZ2 settled at a new high of 72.25, though same spread in SOFR is 52.75.  Euro$ and SOFR straddles down 2-3.5 bps yesterday as the market becomes more certain as to the near term policy path.

–Monday and Tuesday feature auctions of 3s, 10s and 30s.  30y bond yield made a new high for the year this week, and now sits at 3.438% (at futures close) up 3.2 yesterday. Weight on the long end has been evident since the start of August and shows no sign of relenting.  Worth noting that ten yr breakeven is at a new recent low of 243 bps (though it was as low as 230 in July).

–Interesting contrast between Lagarde, who candidly admitted yesterday that ECB forecasts were wrong and shouldered the blame, while Brainard on Wednesday mentioned everything BUT the Fed as a cause of inflation.  

–Consumer Credit data released yesterday show July revolving credit growing at an 11.6% annual rate, with non-revolving only 4.4%.  Possible explanation is that people are becoming more reliant on credit cards for ordinary expenses (of course price increases are another factor).  Today the Fed releases quarterly Z.1 report, which highlights debt levels, though the press typically focuses on Household Net Worth, which was negatively impacted by a significant decline in stocks in Q2. 


I think Powell should slow down. The Fed should actually not raise the target rate by 75 basis points at the next meeting. They should do 25 basis points, and let a little time pass. Powell can keep playing the inflation fighter as long as he’s raising rates gradually. I wouldn’t even care if he skipped a meeting: A 25 basis point hike in September, and then pause at the next FOMC meeting in November. Let’s wait and see what happens because the bond market should be listened to: Every time the bond market is at odds with consensus economists, the bond market is right. And the bond market is saying that yields are peaking

Posted on September 9, 2022 at 5:00 am by alexmanzara · Permalink
In: Eurodollar Options

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