2023 spreads invert further
June 17, 2022
–Short end calendar spreads are sending a very clear signal about the economy and the forward path of central bank policy after hikes by the Fed, SNB and BOE. EDZ2/EDZ3 closed yesterday at -33, down 4.5, and was lower after settlement; in January it was at high as +67. The FF spread Jan’23/Jan’24 settled -15.0; prices 9640.5 and 9655.5. The Jan’23 price indicates 3.6% FF for year-end, but the inversion of spreads covering 2023 means the market perceives those rates will be restrictive enough to kill the economy and create an easing bias next year. EDH3/EDM3 settled -9.0. EDH3 now the clear winner for lowest contract on the strip at a price of 9596 or 4.04%.
–Though bonds rallied strongly, with tens down 8.5 bps at futures settlement to 3.305%, the stock market is slowly realizing what high funding rates mean. Going to be hard for companies to roll debt over without the Fed buying everything in sight, especially if fantasy non-GAAP earnings receive more scrutiny.
–BOJ stuck with ultra-easy policy, allowing $/yen to fully recoup yesterday’s loss; close to 135 now. Powell gives opening remarks this morning at 8:45, at a conference on ‘The Internat’l Roles of the US Dollar’. Even as economic fraying becomes obvious, he’s likely to cite robust labor market and consumer spending. Philly Fed for example was expected 5.5 vs actual print of -3.3. Biden noted that people are “really down” but says recession isn’t inevitable. “The need for mental health in America, it has skyrocketed, because people have seen everything upset.” Not exactly confidence-inspiring. Soooo…here come price controls.
–US rate futures halt Monday at noon Chicago time; no official settlements for Monday. Summer solstice is Tuesday.
