The Captain has turned on the Fasten Seatbelt Sign
May 4, 2023
–Complete melt-up in SOFR futures late in the day and into the new session. SFRM4 low yesterday was 9659, settle was 9668.0. The high on the re-open yesterday afternoon was 9693.5! So the Fed moved the FF target to 5-5.25% and a little over one year forward the M4 contract is consistent with 3-3.25%. The March panic high on SVB was 9714.5.
–In the wake of yesterday’s FOMC, the market is even more convinced that this was the last hike and the next move will be an ease. SFRM3/SFRM4 settled -174.5, now the most inverted one-year calendar and tied with SFRU3/SFRU4 (at settle). SFRM3 settled -5.0 to 9493.5 as it hadn’t priced complete certainty of the 25bp hike, while SFRM4 was +8.0 at 9668.0. Besides saying the banking system is resilient, there was no lifeline for regionals. The latest casualty is PacWest, but there will be more. Facts at ground level are at odds with official pronouncements, but I think we’re all getting used to that. “We pretend to work, they pretend to pay us.” Late in the electronic session M3/M4 trade -184.5, a new low for ANY one-year calendar in this cycle. SFRU3/U4 was -179.0 (this at 3:45 Chicago time).
Implication: the market is moving the EASING timeline forward.
–Astonishingly, FFM3 traded as high as 9498.5 yesterday afternoon. The new EFFR should be 508 or 9492.0. The next FOMC is June 14. At 9498.5, pricing is about 50/50 for an EASE at the next meeting!
–Vol got crushed AS OF SETTLEMENTS. Example, SFRH4 was up 7.5 on the day at 9622.5, but the atm 9625c was UNCH’d AT 60.5.
–5/30 traded at a new high for the year. Late price 36.5. Nearest level was last July at 33.0. Early March high was 51.5.
–Note, with respect to the magnitude of the credit crunch, Powell said it’s hard to equate to rate hikes. However, he did say that the next SLOOS report, Sr Loan Officer Opinion Survey on Bank Lending Practices, will be on Monday, May 8.
