Slower easing?
September 24, 2025
*********************
–Powell’s speech suggested caution with respect to the easing cycle, yet yields edged slightly lower. SOFR contracts out to the greens were +1.0 to +2.5. Peak contract SFRH7 settled 9699.5, +1.5, essentially at 3%. Tens eased 2.1 bps to 4.118%, hugging the new Fed Effective rate. Worth noting is that EFFR never deviated from 4.33 over the previous period, but Monday’s effective was 4.09, up from 4.08, something to keep an eye on with respect to funding pressure.
From Powell’s speech:
But uncertainty around the path of inflation remains high. We will carefully assess and manage the risk of higher and more persistent inflation. We will make sure that this one-time increase in prices does not become an ongoing inflation problem.
Two-sided risks mean that there is no risk-free path. If we ease too aggressively, we could leave the inflation job unfinished and need to reverse course later to fully restore 2 percent inflation. If we maintain restrictive policy too long, the labor market could soften unnecessarily. When our goals are in tension like this, our framework calls for us to balance both sides of our dual mandate.
A newsflash bullet point helped push stocks lower: *POWELL: EQUITY PRICES ARE FAIRLY HIGHLY VALUED
–Another clip of 50k TYZ5 114c bought vs futures yesterday, bringing the two day total to 175k. Settled 32 with 32 delta, 229k open interest. SOFR option volume was light, but new buyer of 30k SFRH6 9725c for 3.0; settled 3 vs 9654.
–Related to the end of Powell’s term, there’s been interest in the SFRH6/SFRM6 calendar, on the premise that large cuts could occur as soon as Powell is out (as per Miran, Bowman). While this spread traded as low as -27.5, yesterday’s settle was at the recent high of -22.5 (9654/9676.5). SFRH6/U6 settled -37 (9654/9691). Really tight given the environment. In some ways, Powell’s comments suggest less easing over the near term, which might mean BIG easing when he’s out, yet the spreads aren’t really reflecting that. I would probably be more inclined to pay 9.5 for SFRU6 9762.5c (71.5 otm) than 3.0 for SFRH6 9725c (71 otm).
–Where SHOULD financing rates be? I don’t know, but this headline from WSJ hints at the need for a little grease:
FORD COURTS RISKIER BORROWERS WITH LOWER RATES FOR F150.
I saw 2.9% for 66 months…which is 80 bps below the current 5yr (5s being auctioned today).
–Interesting Doomberg yesterday notes that China’s efforts for AI and chip technology independence are paying off:
It is no exaggeration to say that these three pillars—NVIDIA’s designs, TSMC’s foundry expertise, and ASML’s near monopoly on the most advanced lithography machines—form the foundation of the current stock market boom.
But the punchline is a somber warning:
If history is any guide, China will not only soon catch up with the West’s three main chip-industry leaders but will eventually surpass them by a wide margin.
–NVDA 178.43 yesterday, -2.8%.
