NFP and the Fed. So what?
Feb 7, 2020
–Payrolls today, followed by the Fed’s semi-annual report to Congress. NFP expected 160k though benchmark revisions will take previous numbers lower. Quarles speech last night was mostly boilerplate, judging the economy to be in a good place with notable risks going forward. Labor markets are strong but still have some slack; capex is weak. He noted that inflation data should begin to pick up as some low readings in early 2019 start to fall out of the data stream. He talked about some regulatory changes to help banks cope during periods of reserve stress, but before that, there was a small section about the level of reserves in general that hints at uneasiness with the market perceiving unlimited Fed largesse: Following the mid-September volatility, the Committee stated that it would seek to maintain, over time, a level of bank reserves at or above the level that prevailed in early September, a level that we believe is sufficient to operate an ample-reserves regime. Looking ahead, I judge that it is reasonable that we ask ourselves whether it may be possible to operate with a lower level of reserves and remain consistent with the ample framework.
–The latest ADG notes that “global junk bond issuance registered at $73.6 billion in Jan, the highest monthly total in 25 years” as junk yield spreads and absolute levels remain exceptionally low.
–It was a low-key day yesterday with little change across the interest rate curve. In spite of NFP and the Fed’s monetary report, events that once upon a time caused large market reactions, implied vol is under a blanket, with a sharp decline from peak [so far] virus fears, as shown in the TY vol chart below. NFP expected 160k. Fed report at 10:00 EST.
–The Federal Reserve’s calendar finally shows that Powell will indeed testify in front of Congress on Tuesday.
