Higher longer
March 8, 2023
–These bullet point headlines tell yesterday’s story from Powell’s semi-annual testimony:
POWELL: “ULTIMATE LEVEL OF INTEREST RATES IS LIKELY TO BE HIGHER THAN PREVIOUSLY ANTICIPATED”
POWELL: IF DATA INDICATE, FED IS PREPARED TO INCREASE PACE OF RATE HIKES
POWELL: RESTORING PRICE STABILITY WILL REQUIRE RESTRICTIVE POLICY STANCE FOR SOME TIME
–Odds swung toward 50 bps for the March 22 FOMC; Friday’s NFP (expected 200k) and Tuesday’s CPI will be key (yoy 6.2 vs last at 6.4).
–Lowest contract on SOFR curve is SFRU3 at 9435.5 or 5.645%; it’s the weakest contract on the day. That’s down 21 from Friday’s settle and -18 yesterday. Low on the FF curve is Oct’23 at 9436.0. Peak rate has moved higher and slightly forward. April FF settled 9502 or 4.98%. Current EFFR is 458, so now pricing 40 bps for March 22. Monday’s settle was 9511.
–Curve became even more inverted. On the SOFR strip; reds (2nd yr) -10, greens -2.625, blues UP 3.375 and golds UP 5.875. Red/green pack spread at new low -89.5. 2/10 new low -103.4. The two year rose 11.2 bps to close just over 5%. The thirty year bond yield fell 2.8 to 3.882. The market is reflecting the idea that further funding increases will indeed kill the economy, though SPX was only -1.5%.
–March SOFR and ED midcurves expire Friday. 0QH 9487.5^ settled 18.5, huge premium for a few days.
Powell today
March 7, 2023
–Powell appears in front of the Senate at 10:00. According to Steve Liesman prepared text will also be released at that time. The curve continued to invert further. 2/10 closed -91, 2/30 is very near -100, an historic low. [At yest close 4.89% and 3.91%]. Yesterday the ten-year ended up 2 bps at 3.98%. Today is the three year auction, followed by 10s tomorrow and 30s Thursday. After Waller last Thursday and Daly over the weekend, who both indicated that the job to control inflation is not over, it’s likely that Powell will stress the need to continue the fight, especially in the context of firm labor markets. “Yes, we’ve seen some evidence of goods disinflation…BUT…” Rates at higher levels for a considerable time.
–RBA raised to 3.60 but some analysts are saying there might be only one more hike as wage growth slows. China/US rhetoric continues to heat up. In the afternoon US Consumer Credit is released (for January) and Manheim Used Car index, last at -12.8 yoy, both of which might give some clues as to household resiliency. New buyer 35k SFRZ3 9412.5/9400ps for 3.0 (settled there ref 9468.0). The Fed’s estimate for end-of-2023 FF was 5.1% in December. The new projection will likely rise at the March 22 dot-plot but the 5.875% strike is somewhat aggressive.
Big week for policy
March 6, 2023
–Powell before Congress for semi-annual testimony Tuesday and Wednesday. Payrolls on Friday. 3,10 and 30y auctions starting Tuesday. Fed’s Quarterly Z.1 Financial Accounts (HH Net Worth, Aggregate Debt levels) is released Thursday. Lagarde says ECB must do more to bring inflation under control.
–Strong rally in stocks and bonds on Friday. SPX +1.6%. Ten year yield reversed hard off Thursday’s recent high of 4.07%, closing down 11 bps at 3.96%. Non-mfg ISM a bit stronger than expected, but prices eased slightly to 65.6. Over the weekend Mary Daly gave a speech explicitly saying higher for longer:
Putting all of this together, it’s clear there is more work to do. In order to put this episode of high inflation behind us, further policy tightening, maintained for a longer time, will likely be necessary. Restoring price stability is our mandate and it is what the American people expect. So, the FOMC remains resolute in achieving this goal.
—5/30 at a new low -36.6 on Friday, with 2/30 at a historic low near -100 (-97.1 at futures settle). Ten year breakeven at new high for 2023 at 252 bps, having started the year around 215. Last year’s high was 302. One other interesting note as the transition in futures to 100% SOFR nears: SFRH3/EDH3 settled just 6 bps (9498.75/9492.75). The official transition is >20 bps different. Everything beyond Sept’23 is settling 26 bps. Sept’23 contracts are the lowest on the two strips. SFRU3 settled 9456.5 (or 5.435%) while EDU3 settled 9430.5 or 5.695%. Pretty juicy libor rate! Note that the high FF rate in the 2004/06 tightening cycle ended at 5.25%
From the FOMC statement June 29, 2006 (the last hike, but it wasn’t obvious from the statement)
The Federal Open Market Committee decided today to raise its target for the federal funds rate by 25 basis points to 5-1/4 percent.
Recent indicators suggest that economic growth is moderating from its quite strong pace earlier this year, partly reflecting a gradual cooling of the housing market and the lagged effects of increases in interest rates and energy prices.
Readings on core inflation have been elevated in recent months. Ongoing productivity gains have held down the rise in unit labor costs, and inflation expectations remain contained. However, the high levels of resource utilization and of the prices of energy and other commodities have the potential to sustain inflation pressures.
Won’t risk a backslide
March 5, 2023 – Weekly Comment
On Thursday, Waller gave a speech with this line:
Last month we received a barrage of data that has challenged my view in January that the Federal Open Market Committee (FOMC) was making significant progress in moderating economic activity and reducing inflation.
On Saturday, the SF Fed’s Mary Daly gave a speech with the following excerpt (same idea):
Overall inflation remains well above target and contributions from each of the components of inflation—goods, housing, and other services—remain well above their historical trend (Figure 2). Moreover, the incoming data have been bumpy. The recent PCE reading is a good example. After months of decline, headline and core inflation both ticked up in January on a 12-month basis, and the monthly inflation rate rose at its fastest pace in seven months. This suggests that the disinflation momentum we need is far from certain.
Putting all of this together, it’s clear there is more work to do. In order to put this episode of high inflation behind us, further policy tightening, maintained for a longer time, will likely be necessary.
On Tuesday, Powell delivers semi-annual testimony to Congress. The report was released Friday, link is at bottom. It’s a long paper, but one notable section is on page 44 of the report (or page 50 of the pdf). It shows this chart with the current FF target, as compared to several rules-based policy prescriptions.
The rules-based models would have the FF target significantly higher than the current 4.5 to 4.75% range.
Powell’s message is likely to build on Waller and Daly. The labor market remains resolute, disinflation has started in goods, but the job is not done. The Fed can’t tolerate an inflation backslide which would risk an unmooring of expectations. On that point it’s worth noting that in December of last year and the start of 2023, the ten-year inflation breakeven was around 215 bps, and on Friday it posted the high of the year at 252 bps, though still well below the 2022 high of 302.
Daly’s speech noted four challenges which could counterbalance or offset deflationary trends of the pre-covid era.
1) A decline in global price competition. “Globalization has been a key driver of past goods deflation in the US… a trend toward less global competition could mean more inflation in the goods sector and more pressure on overall inflation going forward.”
2) Domestic labor shortage
3) Higher costs associated with the transition to a greener economy
4) A rise in inflation expectations
Markets have reacted dramatically to hotter than expected data in February. On Feb 2, SFRM4 notched a high of 9674.5. On Thursday the low was 9528.5, a plunge of 146 bps (settled 9540.5 on Friday). The largest net closing decline on the week was in SFRU4 which settled -11 at 9579.0. That contract traded as high as 9708.5 on Feb 2, and as low as 9566 on Thursday March 2 (142.5 bps). Obviously the reds (second year forward), had the largest moves in order to price the evaporation of the Fed pivot. Well, evaporation is not the correct word, as a review of a few one-year calendars makes clear. SFRH3/H4 was -104 on Feb 2 and +2.5 on March 2. SFRM3/M4 over the same period: -155 to -73.5. SFRU3/U4 -166.5 to -114. On Friday settles were -2.25 (9498.75/9501), -81 (9459.5/9540.5) and -122.5 (9456.5/9579.0). So the period from the middle of this year to mid-2024 is still pricing somewhere around 75 to 125 bps of ease.
Every so often, big name pundits proclaim the Fed is losing credibility or is way ‘behind the curve’. Obviously, the Fed was late in starting this hike cycle. However, it has been an incredibly aggressive year in terms of Fed adjustment. At the end of 2021 mortgage rates were sub-3%. On Friday the 30-yr fixed was 7.1%. The 2/10 spread is unambiguously reflecting tight policy, at a low for the cycle at -89. On Friday, Larry Summers was on BBG tv: “The Fed right now should have the door wide open to a 50 bp move in March. A reasonable assessment of where the Fed is would say that they have not been this far behind the curve for a year or so.” That is NOT a reasonable assessment, it’s blather for tv. The Fed just started to hike one year ago. The ’rules-based’ chart above shows how much the Fed has closed the gap. In any case, it’s worth noting that the Fed has more to think about than Larry. For example, there’s this clip from the Monetary Report Summary under ‘Financial Stability’:
Valuations in equity markets remained notable and ticked up, on net, as equity prices increased moderately even as earnings expectations declined late in the year. Real estate prices remain high relative to fundamentals, such as rents, despite a marked slowing in price increases. While market functioning remained orderly, market liquidity—the ability to trade assets without a large effect on market prices—remained low in several key asset markets, including in the Treasury market, when compared with levels before the COVID-19 pandemic.
For a while there, Financial Stability was almost thought of as a 3rd mandate for Fed policy. Now it’s back to the dual mandate of inflation and employment, dominated of course by considerations relating to the former. However, a couple of big blow-ups can put stability right back on the front burner.
OTHER THOUGHTS/ TRADES
April Fed Funds settled 9511.5. There is no FOMC in April, so FFJ3 prices the March 22 FOMC. A hike of 25 would cause a likely final settle of 9517 in FFJ3 (4.83%) and a hike of 50 at 9492 (5.08%). Half way would be 9505….sort of depends on Powell.
In the past few sessions, there has been a buyer of approx 80k SFRH4 9625/9725c spreads 9-9.5 and 20k of the 9612.5/9712.5cs. Settles 9.0 and 10.25 ref 9501.0. While most attention has been to the downside, it’s worth recalling that there have been several large call spreads accumulated over the past month. Apart from SFRH4, on Feb 1 there was a buyer of at least 100k SFRZ3 9550/9750cs for 33-35; this spread settled 11.25 vs SFRZ3 9471.5.
The week before last there was a buyer of 100k 2QZ3 9775/9875cs for 7.0 to 8.0 ref 9653.0 in SFRZ5. Settled 8.0 on Friday ref 9648.0. And on Friday there was a buyer of 82k SFRU4 9850/9950/10050 put flies for 0.5. Strangely done as a put fly, settled 0.25 (271.25/371.0/471.0); the max value is still at middle strike with a yield of 0.5%.
Obviously there are a few participants either worried about stability or thinking that past and current tightening will all at once cause a sharp reversal in rates.
Payrolls Friday expected 200-210k
Treasury auctions 3s, 10s and 30s Tuesday, Wednesday, Thursday.
| 2/24/2023 | 3/3/2023 | chg | ||
| UST 2Y | 480.7 | 485.6 | 4.9 | |
| UST 5Y | 421.0 | 425.1 | 4.1 | |
| UST 10Y | 394.7 | 396.2 | 1.5 | |
| UST 30Y | 393.2 | 388.5 | -4.7 | |
| GERM 2Y | 302.9 | 321.4 | 18.5 | |
| GERM 10Y | 253.7 | 271.5 | 17.8 | |
| JPN 30Y | 143.8 | 141.4 | -2.4 | |
| CHINA 10Y | 291.6 | 292.1 | 0.5 | |
| SOFR H3/H4 | -8.0 | -2.3 | 5.8 | |
| SOFR H4/H5 | -124.0 | -124.0 | 0.0 | |
| SOFR H5/H6 | -24.5 | -27.0 | -2.5 | |
| EUR | 105.86 | 106.35 | 0.49 | |
| CRUDE (CLJ3) | 76.32 | 79.68 | 3.36 | |
| SPX | 3970.04 | 4045.64 | 75.60 | 1.9% |
| VIX | 21.67 | 18.49 | -3.18 | |
https://www.federalreserve.gov/monetarypolicy/files/20230303_mprfullreport.pdf
Challenged Outlook
March 3, 2023
–Nice thing about Waller: he’s direct. Here’s the opening line of yesterday’s speech:
Last month we received a barrage of data that has challenged my view in January that the Federal Open Market Committee (FOMC) was making significant progress in moderating economic activity and reducing inflation. I’m not the only one whose outlook has shifted. Since the end of January, financial market participants have revised their outlooks in a way that has led them to mark up their expectations for the federal funds rate at the end of 2023 by about a half percentage point.
He clearly focused on the tight labor market while acknowledging some improvement in inflation. “When the facts change, I change my mind…” From a risk management perspective, I think the Fed fears an inflation backslide more than a sharp drop in economic activity, especially in light of strong labor data. Market sentiment clearly shifted in February, for example on Feb 2, SFRH3/H4 spread was -104 and it settled yesterday +2.5 (9499/9496.5), a swing of over 100 bps representing a revision from significant ease over the year to continued restraint. FFJ3 (April FF) settled 9511, a new recent low. Again, a hike of 25 in March would put the contract at 9517 and a hike of 50 at 9492, so the market keeps grinding a little closer to 50. Yesterday there was a buyer of 40k SFRJ3 9437.5/9425/9412.5p fly for 1.0. Max value would be a mid April price on SFRM3 of 9425. SFRM3 is currently 9459.5 or 5.405. Current EFFR is 4.58. So, as it now stands, SFRM3 is 82.5 higher than the current EFFR. There are FOMC meetings March 22, May 3, June 14 and July 26 which can all impact SFRM3 (of course the July meeting will have muted effect as it’s midway thru the period). For the April put fly to approach middle strike, aggregate tightening perception would be 1-1.25%. 50 in March, 25 May and 25 in June? Certainly not out of the question at this point. Perhaps a better play was the buyer of SFRM3 9450/9437.5ps vs 9487.5c for 0.75…of course, there’s open ended upside risk with the short call.
–All treasuries ended over 4% yesterday, with 2s 4.902% (+1.7 on the day) and 30s 4.02 (+7.1). Note that it was a bear steepener. Tightening is already significantly priced in the front end, but imagine for second if tens and thirties jump another 50 to 75. In 2006-2007 all yields topped around 5.15 to 5.25. The ten year ended yesterday at 4.07. A rapid shift higher in long rates would cause serious dislocations.
–Conventional thirty-year fixed mortgage said to be 7.1%. Today’s news includes ISM Services expected 54.5 from 55.2 last.
The Fat Thumb Presses Down on Red SOFR Contracts
March 2, 2023
–Well, the guy who hoovered up 60k 0QJ3 9500 puts for 7-7.5 on Tuesday afternoon seems to know what he’s doing, as SFRM4 fell to a new low settle 9536.5 (-12 on the day) and the puts settled 10.25. Higher yields across the board, where tens rose 7.7 to 3.991% (and >4.04% this morning), while the short end led the way with 2s up 9 bps to 4.885%. On the SOFR curve, SFRU4 and Z4 were weakest at -12.5 (9576 and 9605.5). All near calendars made new highs, while spreads from reds back made new lows. SFRH3/H4 finally settled positive (9499/9496.5). However, the most inverted one-yr calendar on the strip is Z3/Z4 at -138.5, indicating strong expectations for ease next year. Though front end option plays have focused on rising rates, there is still accumulation of some upside plays. For example, a buyer over the last two days of 40k SFRH4 9625/9725cs for 9-9.5; settled yesterday at 7.75 vs 9496.5; as market broke he lowered the strikes and bought 5k 9612.5/9712.5cs which settled 9.0.
–Another note on front calendars which ties into demand for puts on SFRM4: March’3/March’4 settled +2.5, but the next 1-yr, June’3/June’4 settled NEGATIVE 78 (9458.5/9536.5). It’s a new high, but if the front spread can go positive is it impossible for the next one to also do so? One might say that the Fed has successfully guided a sentiment change in the market: HIGHER for LONGER. Of course, that change in outlook doesn’t sit quite as well with equities and other long-dated assets.
–Eurozone inflation 8.5%. A Reuters headline captures the dilemma: ‘ECB confronts a cold reality: companies are cashing in on inflation.’ Of course, in the US cost-of-living adjustments to Social Security (up 8.7% in ’23 for 70 million people) has had the same inflation-reinforcing effect.
–Yesterday’s Mfg ISM was slightly weaker than expected at 47.7, but they didn’t like the Prices Paid component 51.3. Today’s news includes Jobless Claims expected 195k.
New large put buying on contract lows
March 1, 2023
–Exit seller of about 50k SFRZ3 9450/9400ps 14.5 to 14.0 yesterday, settled 14.25 vs 9475.0. This was originally bought Feb 13 for 9-9.25 when Z3 was trading 9512.5. However, of greater interest was a late buyer of >60k 0QJ3 9500p for 7.0 to 7.5. Most buying occurred after settle of 6.5 v 9548.5; 7.5 was being paid as contract was trading 9545.5 late. Yesterday, underlying contract SFRM4 printed an early low of 9543.0, which is the contract low (also printed there on Monday). This morning there’s a new contract low print of 9542.5. Large new put buying on contract lows! China’s PMI was 52.6 vs 50.5 expected, highest since April 2012 (re-open). In the US, Mfg ISM is expected 48.0 from 47.4 last.
–Pressure on SFRM4, and reds in general, helped SFRM3/M4 spread settle at a new high of -86.0. 2/10 also made a new closing low of -88, though -92 printed a few days ago. Ten year yield was nearly unch’d at 3.914%. Somewhat interesting that Goolsbee, the new Chicago Fed President had this remark in his inaugural speech:
The temptation can be to look at what’s easy to find and lean more on that—stock market, bond market, and other financial data that give instant reactions to news about the economy and our policy announcements and tell us which way the markets want the Fed to move. But it is a danger and a mistake for policymakers to rely too heavily on market reactions.
–What’s easy to find is the most inverted yield curve since the 1980s. Let’s just pretend it isn’t there.
–I saw a small clip yesterday of CNBCs Sorkin interviewing David Solomon, Goldman’s CEO. He cited opportunities for growth in ‘wealth management’. It’s all about gathering assets in an environment where relatively high rates make fees seem a bit less egregious. It’s not that there’s anything wrong with that, but is the wealth management industry really doing a great job? Once again, it harkens back to the early 1980s with this line in Trading Places from Jamie Lee Curtis as Ophelia. “I’ve saved 42 grand, in t-bills, earning interest.” The one-year bill was north of 10% in 1983. No fees on that! (You know the scene. Go ahead, youtube it. You’re welcome).
–In a sliver of hope for Chicago, Lori Lightfoot was defeated in her quest for a second term. Crime was the main issue. In a long-forgotten political note, the first woman to be mayor in Chicago was Jane Byrne. She beat Bilandic. The main issue then was lack of snow removal related to the blizzard of 1979.
The Fed convinces the market eases aren’t coming (with a little help from bad data)
February 27, 2023
–Rate futures crumbled Friday on higher than expected PCE prices, +0.6 on the month and 5.4% on the year. YOY Core 4.7%. The 2y yield soared nearly 12 bps to 4.807% while tens rose 7 to 3.947%. 2/10 remains pinned to recent lows at -86. April FF contract settled 9512 as the market slowly prices increasing odds of a 50 bp hike at the March 22 FOMC (9517 would equate to a 25 bp hike). New highs in near calendar spreads, for example SFRH3/SFRH4 settled -8 (9500/9508), having been as low as -104 in the beginning of February. The Fed has quickly realized its goal of convincing the market that easing is unlikely to happen any time soon (though it wasn’t really the Fed, but rather unwelcome data that drove the move).
–Today’s news includes Durables and the Dallas Fed Mfg index. The Fed’s Jefferson gives a speech at 10:30; his first speech as a board member last October cited strong labor markets and high inflation. “…inflation remains elevated, and this is the problem that concerns me most.” I wouldn’t expect much of a change.
–Friday featured a large new buy of 100k 2QZ3 9775/9875cs from 7 to 8 bps, settled 7.75 vs 9553.0. Underlying contract is SFRZ5. Expiration date Dec 15, 2023. This week brings ISM Mfg and Services, but the employment report is one week from Friday on March 10.
It’s a Foghorn Leghorn Market
February 26, 2023 – Weekly comment
SFRM4 was down an astonishing 38 bps on the week to 9551, with the next closest, SFRH4, down 34 to 9508. The high settle this year in M4 was on Jan 18 at 9683.5, a plunge of 132 bps in the space of a little over a month. The lowest settle in this contract last year was on Nov 7 at 9564. These moves have been extraordinary. And, at 9551 or 4.49%, the contract is STILL pricing over ¾% of easing from the expected peak terminal rate, as SFRM3/SFRM4 one-yr calendar is -88. 0QM3 9550p, which had been bought in large size for 5.0 on February 1, settled Friday at 32.5.
The initial large catalyst was the Feb 3 payroll report with NFP of 517k. Not all the news was hotter than expected over the month, but Friday’s PCE prices of 5.4% yoy with Core 4.7% vs expected 4.3% certainly was. On Friday alone SFRM4 fell 21 bps and the 2-yr note jumped nearly 12 to 4.807%. That’s a new high for the cycle in twos, and the highest since the end of the last major hiking cycle of 2004-06 when the 2y yield topped at 5.28%, essentially equal to the FF target peak of 5.25%. In mid-2006 all treasury yields topped around 5.25%, then fell back into the end of the year, and by mid-2007 tested or slightly exceeded the 2006 highs. Then yields collapsed.
As we move into March, it’s worth noting that the employment report is not the first Friday, but rather March 10. The FOMC meeting is a week and a half later on March 22. April treasury options expire on March 24.
Repeating from last week: “From February 2 on, the Fed Effective rate has been 4.58 except for one print at 4.57. If the Fed hikes 25 in March the new EFFR should be 4.83, if 50 then 5.08. April FF, which prices for the March 22 FOMC, made a new low this week, printing 9512.0 or 4.88.” Last week was another new low at 9508, and the settlement was 9512. Moving towards NFP and FOMC, it wouldn’t be surprising to see odds closer to 50/50 for a half-percent hike, meaning a price in FFJ3 around 9505.
Two weeks ago the lowest contract on the FF strip was FFQ3 at 9470.5. Last week August, Sept and Oct are tied at the low point, 9460.5 or around 5.4%. The assessment of the terminal rate has been adjusted a bit higher and nudged back.
Consider these one-year FF calendars: FFJ3/FFJ4 settled positive 9 (9512/9503). April is a ‘clean’ month, with no FOMC meetings. On January 18, this spread had been -98.5. So, in a little over one month the market changed perception, from an ease of 1% to NO EASE over the year. Now look at FFK3/FFK4, just one month forward. There is an FOMC on May 3 which is being fully priced for a 25 bp hike (FFJ3/K3 is 24 bps, 9512/9488). FFK3/FFK4 is negative 33.5 (9488/9521.5). Just like April/April, 100 bps of projected ease has been squeezed out as the spread rallied from -135 to -33.5 in the past month. But the comparison of J3/J4 at +9, to K3/K4 at -33.5 still conveys a message of, “the more you hike, the more you’re going to have to cut.”
2/10 remains pinned near historic lows at -86. While there are signs of fraying at the edges, for example American Car Center, a sub-prime auto lender, just sub-merged, the Fed is focused on strong jobs and too-high inflation. And, though the Fed tiptoes around the stock market, the BOE’s Silvana Tenreyro isn’t timid: *BOE’S TENREYRO: SQUEEZE ON WEALTH WILL BRING DOWN INFLATION. There.
Other news this week includes Chicago PMI on Tuesday. At 44.3 last, there were only a few lower marks in the past 20 years outside of the GFC and Covid. ISM Mfg is Wednesday. Same thing, it’s at the low end of the last 20 years, eclipsed only by the GFC and Covid spikes. ISM Services is Friday, and that of course, has not seen a sustained downturn. Speeches by the Fed’s Jefferson on Monday, Goolsbee on Tuesday, and Waller on Thursday are likely Fed highlights.
OTHER THOUGHTS/ TRADES
Friday featured a new buyer of 100k 2QZ3 9775/9875 call sprd 7.0 to 8.0. 2QZ is a December midcurve on SFRZ5, settled 9.0/1.25 ref 9653, so 7.75. Perhaps just an opportunistic buyer given that Friday’s settle in Z5 is nearly 100 off the year’s high, set on Jan 18, of 9740.5.
While the recent sell off has been dramatic, consider the chart of SFRM4 below. There have been two previous sell-offs corresponding with the Fed’s tightening cycle, both of nearly 200 bps. The first started in March 2022 and ended mid-June, three and a half months. The next started August 1 and ended Nov 7, a bit over three months. This one began Jan 18 and has gone 132 so far. If the time duration is similar, mid-to-late April, right in front of the May 3 FOMC would mark the bottom.
| 2/17/2023 | 2/24/2023 | chg | ||
| UST 2Y | 459.5 | 480.7 | 21.2 | |
| UST 5Y | 400.5 | 421.0 | 20.5 | |
| UST 10Y | 382.4 | 394.7 | 12.3 | |
| UST 30Y | 388.2 | 393.2 | 5.0 | |
| GERM 2Y | 287.7 | 302.9 | 15.2 | |
| GERM 10Y | 244.0 | 253.7 | 9.7 | |
| JPN 30Y | 148.3 | 143.8 | -4.5 | |
| CHINA 10Y | 289.0 | 291.6 | 2.6 | |
| SOFR H3/H4 | -39.0 | -8.0 | 31.0 | |
| SOFR H4/H5 | -112.0 | -124.0 | -12.0 | |
| SOFR H5/H6 | -22.5 | -24.5 | -2.0 | |
| EUR | 106.96 | 105.86 | -1.10 | |
| CRUDE (CLJ3) | 76.55 | 76.32 | -0.23 | |
| SPX | 4079.09 | 3970.04 | -109.05 | -2.7% |
| VIX | 20.02 | 21.67 | 1.65 | |
In: Eurodollar Options
The Fed is Monitoring
February 24, 2023
–Had a friend working on the floor at our desk, everyone called him Zeets. Though he was clerking on the CME floor, he was training to become a teacher, and had assignments of going to classrooms and schools as an observer. He told the story of a big fight that broke out at a highschool in the student hall. “What did you do, Zeets?” Deadpan reply, “I observed”.
–Today we observe the Fed’s preferred inflation measure. PCE prices yoy expected 4.9% from 5.0 last, with Core 4.3 from 4.4. Incidentally Japan’s Core CPI yoy was 4.2%; Ueda said BoJ will maintain easy policy as inflation is mostly due to rising raw import prices. Also related to the inflation conversation, a candidate for Fed Vice Chair, Janice Eberly, favored a 3% inflation target to speed recovery from the covid crisis. Fooling around with inflation targets doesn’t seem to be that great of an idea, as this old chart from my library indicates (shows the adoption of FAIT in August 2020, suspiciously related to a surge in agricultural product prices).
–Yesterday I clipped a small excerpt from the FOMC minutes:
“In their discussion of issues related to financial stability, several participants discussed vulnerabilities in the financial system associated with higher interest rates, including the elevated valuations for some categories of assets, particularly in the CRE sector;“
This morning it’s reported that Columbia Property Trust (controlled by PIMCO) has defaulted on ~ $1.7 billion of mortgage notes on seven buildings. Late Jan/early Feb Blackstone gated REIT funds that were seeing heavy withdrawals. Larger problems ahead as pre-covid leases expire in the new WFH environment? Don’t worry…the Fed’s ON IT. (Like Zeets).
–Yields generally fell yesterday, with tens down 4.2 bps to 3.877%. TYH3 settled 111-14 with the 111.5^ expiring today settling at 28/64. Weakness in front reds on the SOFR curve: Example, SFRM3 was UP 2.5 to 9466.5, but M4 was DOWN 1 at 9572 and M5 was UP 5 at 9657. New recent low in red/green SOFR pack spread at negative 71.875. There was a seller (exit) of 25k SFRU3 9450/9400ps at 12.0 covered 9466 (orig buy 2/17 paid 6.0 vs 9495.5 for 100k).
–In a world of geopolitical fragility, maybe it’s worth mention that there were explosions followed by anti-aircraft fire in the Iranian city of Karaj which has a centrifuge factory and was previously targeted by Israel. Didn’t really see this reported in mainstream press, but there was a time when there was a pre-weekend tilt towards flight-to-safety.
https://www.timesofisrael.com/blasts-anti-aircraft-fire-seen-in-iran-city-said-to-have-been-hit-by-israel-in-2021/
