Teach Your Children Well (Crosby Stills Nash & Young)
January 20, 2023
–Interesting comments from Brainard yesterday; here are a couple of snippets:
Core PCE inflation is running at a 3.1 percent annualized pace on a 3-month basis—below its 3.8 percent reading on a 6-month basis and 4.5 percent on a 12-month basis.
…housing services inflation remains stubbornly high at 8.8 percent on a 3-month basis—compared with 7.7 percent on a 12-month basis. Housing services are making an annualized contribution to core PCE that is more than double their contribution before the pandemic. That said, the housing sector is highly interest sensitive, and the most recent reading of one national indicator pointed to house prices having declined 2.5 percent over the five months ending in November.
Overall, the labor share of income has declined over the past two years and appears to be at or below pre-pandemic levels, while corporate profits as a share of GDP remain near postwar highs.
–If Core PCE is 3.1% and housing is making an outsized contribution, then the recent declines in housing prices should bring Core down even more rapidly. On the labor side she pointed out that “employment at temp-help services firms – a good leading indicator – peaked in July ’22 and have been declining since then, ending the yr only slightly above its Dec 2019 level.”
–On that score, note that Google is cutting 12k jobs, immediately after MSFT announced a cut of 10k. Do I hear 14?
–The market has accepted 25 bps as the probable outcome of the Feb 1 FOMC, with FFG3 settling 9541.5 or 4.585%. Current EFFR is 433. The subsequent meeting is March 22, a week and a half after SFRH3 options expire. April FF, a ‘clean’ month with no FOMC, settled 9522 or 4.78%, indicating high odds of another 25 in March.
–Huge trades went through SOFR options yesterday to peg these outcomes: +80k SFRH3 9512.5/9518.75/9525/9537.5c condor for 1.5 to 1.75 (settled 1.5 vs 9516.5). Max profit of 6.25 less premium paid occurs between middle strikes, that is, two more 25 bp hikes. In June SOFR it was the 9500/9512.5/9525/9537.5 c condor, bought for 3.5 to 3.75 in size >40k. Settled 3.75 vs 9513. Same idea.
–Ten yr yield rose 2.4 yesterday to 3.397%. One-yr SOFR calendars remain anchored at new lows, though SFRZ23/Z24 squeaked out a new low at -152.5.
–Lacy Hunt’s Hoisington missive. It’s all about velocity…
https://hoisington.com/pdf/HIM2022Q4NP.pdf
