When the hard data confirms
March 26, 2025
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–Yields slightly lower Tuesday, retracing a small part of Monday’s rise. Tens down 2.5 bps to 4.304%. FFJ4 settled exactly at the EFFR rate of 4.33%, at 9567.0. One year forward FFJ5 settled 9642.5 or 3.575, three-quarters of a percent lower (8 FOMC meetings in between). New high in 5/30 treasury spread, 60 bps (4.052% & 4.652%). The high of last September was 61.3, intervening low was 25. Current level testing Sept, is the highest since 2021, before the Fed started to hike. Five-yr auction today, followed by 7s tomorrow.
–Early buyer of 60k 0QU5 9550p for 4.5 (ref 9642.5). Settled 3.75 vs 9648.5, nearly 100 bps otm (OI +49k). The 100 bp CALL otm is the 9750 strike, which settled 7.25. The 9550 strike is 4.5%, which is the upper end of the band of the current FF target, 4.25 to 4.5%. The 2.5% strike, the 9750c is nearly 2x as much premium, but the strike is 200 bps away from the current upper band.
–You would have to think the economy is going to take a cliff-dive to buy the 9750 strike, right? Well, today’s Consumer Confidence number was the lowest in four years at 92.9. Philly Fed Services at -32.5, lowest in 5 years (covid). From a CNBC survey:
The economy will enter a recession in the second half of 2025, according to a majority of chief financial officers responding to the quarterly CNBC CFO Council Survey.
https://www.cnbc.com/2025/03/25/recession-is-coming-pessimistic-corporate-cfos-say-cnbc-survey.html
And from FT: Moody’s warns on deteriorating outlook for US public finances
–Will the hard data lag in confirming? Below are Powell’s comments relating to sentiment, at the last press conference, highlights added:
But the second factor is, it’s so highly uncertain, is just, you know, we’re sitting here thinking, and we obviously are in touch with businesses and households all over the country. We have an extraordinary network of contacts that come in through the reserve banks and put it in the Beige Book, and also through contacts at the Board. And we get all that, and we do understand that sentiment has fallen off pretty sharply, but economic activity has not yet. And so we’re watching carefully, so I would tell people that the economy seems to be, seems to be healthy. We understand that sentiment is quite negative at this time, and that probably has to do with, you know, turmoil at the beginning of an administration. It’s making, you know, big changes in areas of policy. And that’s probably part of it. I do think the underlying unhappiness people have about the economy though is more, is more about the price level. [rather than actual current inflation]
