Ease now, ease (more) later
Sept 9, 2024
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–Though Friday’s employment data wasn’t soft enough to convince the market of a 50 bp cut at next week’s FOMC, deferred SOFR contracts made new highs. For the record, NFP was +142k and the Unemp Rate was 4.2%. Action was primarily in SOFR contracts; ten year yield fell only 1.5 bps to 3.71%. TYZ4 closed +8.5 at 115-005. Pre-data TYZ4 115^ was 3’02/3’04, it immediately sank to 2’57/2’59 and settled 2’59. TYV4 115^ went from 1’33 to 1’15. This week’s main events are the Presidential debate tomorrow, CPI Wednesday and treasury auctions of 3s, 10s, 30s starting tomorrow.
–As noted on weekend piece, SOFR spreads recorded extreme closing levels. SFRM5 was the star performer, closing +16 at 9691, or 3.09%, vs current FF of 5.25-5.5%. SFRU4 settled -1.75 at 9510.5, but SFRZ4 was +7.0 at 9593. The 3-month spread of -82.5 bps is easily a new low. The message seems to be, ‘if the Fed doesn’t ease 50 at the Sept meeting, then it may have to cut more forcefully post-election.’ SFRU4/SFRU5 settled with nearly 200 bps of inversion: 9510.5/9707.5 or -197. FFV4 settled -2.5 at 9499.5, leaning closer to a 25 bp ease (9492 or 5.08%). FFF5 which captures FOMCs on Sept 18, Nov 7 and Dec 18 settled 9584.0 or 4.16%. Current EFFR is 5.33% so that’s 117 bps of ease over three meetings.
–If the buying was all up front (H5, M5, U5 strongest) then it makes sense that the curve steepened from there, which indeed it did. 2/10 at new high near +6 bps, with 2’s -9.4 bps to 3.652 and 10’s down 1.5 at 3.71%. 5/30 spread also posted a new high at +53. Ten-yr breakeven ended just above 2% at 2.036.
–Markets are pulling back this morning. TYZ4 prints 114-20 which is under Thursday’s close of 114-24. Stocks have rebounded as $/yen has popped from Friday’s drubbing, now 143.48. Today’s news includes Consumer Credit for July, a lagging piece of information, but it still may provide hints on the state of the consumer. Expected +$12b.
