Thanks
November 27, 2024
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–Minor bounce back in curve. Yesterday I had noted re-inversion of 2/10 to just under zero, but using the new 2y note 2/10 is back to +4.8 bps (4.256/4.304) . Of course, just the one-month between 2y auctions is worth a couple of bps with the front end inverted as much as it is. Looking at first red to first gold on the SOFR strip, currently Z5 to Z8 (which I consider as a rough proxy for 2/10) it rose by 3.5 bps yesterday from a new recent low of -19.5 to -16.0.
–Minutes were released from the Nov 7 meeting. Headlines this morning mostly echo this one from FT: ‘Fed minutes show officials backed gradual pace of rate cuts.’
In the report, staff noted that the market had priced a less aggressive Fed. Anyone watching forward SOFR contracts is already aware of that. Since the Sept 18 FOMC, SFRU5, one year forward, went from 9703.5 to current 9602….down over 100 bps. Current EFFR is 4.58% so SFRU5 at 9602 is around 4%…a spread of just 60 bps. Currently we’re priced at odds of about 50/50 for a cut at the Dec meeting, which would put EFFR at 4.33.
–Continues to be buying of TY puts. Yesterday pre-open +20k each TYF 108p and TYG 106.5p for 8 and 8 (those appear to be covers). But then more Jan 108s, 107.5s and 107s were bought; settled 8, 6 and 4 with open interest in latter two +9k. Also a new buyer of week-5 109.75p for 3 covered 110-115, open int +11k, settled 2.
–Big data day with PCE prices expected 0.2 and Core 0.3 (m/m). Year/year expected 2.3 from 2.1 and Core 2.8 from 2.7. Jobless Claims expected 215k.
–Man of the people Illinois Governor JB Pritzker, who is vowing to stand in Trump’s way to single-handedly defend democracy, is said to be the mystery buyer of Ken Griffin’s $19 million condos.
“This most recent deal at No. 9 Walton is so far the city’s priciest sale of the year, and fourth-priciest of all-time in Chicago.”
Scene is at the ‘el’ stop just behind the CBOT annex
–Below are a couple of snippets from FOMC minutes. [My emphasis]
Regulatory capital ratios in the banking sector remained high; however, banks continued to hold large quantities of long-duration assets, leaving them more exposed than usual to an unexpected rise in longer-term interest rates. In the nonbank sector, leverage at hedge funds remained high, partly on account of the prevalence of the Treasury cash–futures basis trade. Life insurers’ leverage remained somewhat elevated, and they continued to maintain large holdings of risky and illiquid securities. By contrast, broker-dealer leverage remained low, as their capital increased in line with their assets. Vulnerabilities associated with funding risks were also characterized as notable.
Many participants noted that the slowing in these components of core inflation corroborated reports received from their business contacts that firms were more reluctant to increase prices, as consumers appeared to be more price sensitive and were increasingly seeking discounts.
A few participants cited business contacts who were using attrition, instead of layoffs, to manage the size of their workforce.
However, several participants cautioned that low- and moderate-income households continued to experience financial strains, which could damp their spending.
A couple of participants observed that the banking system was sound but that there continued to be potential risks associated with unrealized losses on bank assets. Many participants discussed vulnerabilities associated with CRE exposures, focusing on risks in the office sector. A few of these participants noted signs that the deterioration of conditions in this sector of the CRE market might be lessening. A couple of participants noted concerns about asset valuation pressures in other markets. Some participants commented on cyber risks that could impair the operation of financial institutions, financial infrastructure, and, potentially, the overall economy; these participants noted, in particular, vulnerabilities that could emanate from third-party service providers. A couple of participants also mentioned third-party service providers in the context of risks associated with brokered and reciprocal deposit arrangements. Several participants noted that leverage in the market for Treasury securities remained a risk and commented that it would be important to monitor developments regarding the market’s resilience. A few participants discussed vulnerabilities posed by the growth of private credit and potential links to banks and other financial institutions. A couple of participants commented on the financial condition of low- and moderate-income households that have exhausted their savings and the importance of monitoring rising delinquency rates on credit cards and auto loans. A couple of participants remarked on the successful implementation of the Securities and Exchange Commission’s money fund rules, noting that it would reduce financial stability risks posed by domestic MMFs.
