Right trip, wrong car
March 21, 2024
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I been in the right place
But it must have been the wrong time
I’d have said the right thing
But must have used the wrong line
I been on the right trip
But I must have used the wrong car
Head is in a bad place and I wonder what it’s good for
-Dr John
–The risk was that the 2024 dot would only project TWO 25bp eases instead of the three which had been penciled in at the Dec FOMC. As it turned out, the 2024 dot remained at 4.6 (3 eases) and there was a collective sigh of relief. The market was caught wrong-footed, having prepared for a less accommodative 2024 dot. Mad rush into stocks by the grasshoppers.
–Yesterday I wrote: “I would recommend leaving 2024 at 4.6, but push 2025 back up to 3.9 and notch 2026 up to 3.1. The front end of the SOFR curve is already fairly priced with the current 2024 projection, but forward rates would likely achieve tighter financial conditions which will support deceleration in Service inflation.” Right church, wrong pew. Rates fell across the curve and stocks jumped even though I correctly pegged the SEP.
–Precious metals exploded higher with April Gold now 2203.50, +42.50. Spot gold hit an all-time high of 2222. DXY had an outside range and closed lower, but is firming this morning. The 2y yield fell 9 bps to 4.598% while 10s fell only 2.4 bps to 4.271%. 2/10 edged to new recent high of -32.7 while 5/30 popped 7.6 bps to +21.4. SOFR curve steepened accordingly with reds +7.875 and golds actually lower on the day by -0.75. Avg pack prices (rounded): Whites 9535.5, Reds 9617.0, Greens 9633, Blues 9631, Golds 9621. Two observations: the first to second year is -81.5 (3 to four rate cuts). But then all contracts are 3 5/8% to 3 7/8%. Forward rates are not projecting inflation falling back to 2% with rates at 3%. Ants take notice.
–On the topic of QT, Powell said a decision to slow the pace would be made “fairly soon”. He said the Fed is closely monitoring money markets, and that reserves are now “abundant” but the goal is for reserves to be “ample”. Almost sounds as if the Fed is waiting for overt tightness in money markets before committing to a change in QT.
–Either the market is missing the Fed’s signal of relative forward restraint, or just doesn’t care or believe. Probably the latter. Given FF and Core PCE projections, real FF are 2.0 in 2024 (4.6 vs 2.6), 1.7 in 2025 (3.9 vs 2.2) and 1.1 in 2026 (3.1 vs 2.0).
