Trying to square inconsistencies
March 18, 2021
*POWELL: RATES WERE AT ZERO FOR 7 YRS WITHOUT FINANCIAL EXCESSES
….not with wartime gov’t spending!!!
–Powell will be gone in February. I didn’t watch the press conference, so I am just relying on projection materials and dots, and it seems as if squaring the actual projections with the idea of keeping funding rates at zero would be a magical task. In December, the projection for PCE inflation was 1.8 for 2021. Yesterday it was bumped up to 2.4! Core PCE inflation from 1.8 to 2.2%. GDP from 4.2 to 6.5. Unemployment from 5.0 to 4.5. The Fed is projecting a [temporary] boom. If these estimates are anywhere NEAR correct, and the Fed attempts to hold FF near zero, then long rates will surge. The projection materials indicate conditions for ‘liftoff’ by the end of THIS YEAR. As market lore says (most recently Bianco) the Fed stays the course until something breaks, which is what occurred at the end of 2018. As soon as Powell is replaced as chair, the Fed will be raising rates, if not sooner.
https://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20210317.pdf
–Don’t take my word for it. Look at the net changes at the back end of the euro$ curve (4th and 5th years, blues and golds)
blues:
EDM4 9866.0 +4.0
EDU4 9850.5 +3.0
EDZ4 9836.5 +2.0
EDH5 9824.5 +0.5
then the golds…same magnitude, opposite sign
EDM5 9813.5 -0.5
EDU5 9803.5 -1.5
EDZ5 9792.0 -3.0
EDH6 9783.0 -4.0
All of the back one-year calendar spreads rose at least 4.5 bps. Of course, 5/30 leapt to a new high of 166.5 (at futures close) up 10 bps with fives down 5.3 bps to 77.1 and thirties up 4.7 bps to 243.6. Unsurprisingly USM is printing new lows as of this writing at 153-28. The recent dynamic is that a steeper curve weighs on tech, so Nasdaq may see additional pressure that could stem selling in the long end. It will likely be a seesaw pattern lower for both, and quite difficult to maintain core shorts. But something is going to “break”.
–EDU1/EDU2 settled 12.5. From this, we might call the odds of a 25 bp hike 50/50 within that time frame. The peak one-year calendar is EDM23/EDM24 at 71.5, which has the added feature of straddling the end of libor, so saying that this spread projects 3 hikes over that time frame isn’t quite right. The point is that Powell has sort of boxed himself in, while the dots indicate that not all members agree with the “zero forever” mantra.
