Hawkish Pirouette
December 16, 2021
–I was wrong about Powell sounding a more dovish tone at the press conference; front end contracts were the weakest on the strip with EDM2 and EDU2 settling -5.5 at 9943.5 and 9922. The five year treasury rose 2.5 bps in yield to 1.255% while 30s were up 3.6 to 1.852%. In the Summary of Projections, PCE inflation notched up from 4.2 in Sept to 5.3% yesterday for 2021 (belatedly reflecting the reality in the data). For 2022, it rose from 2.2 to 2.6 and for ’23 from 2.2 to 2.3. The FF rate leapt from a guess of 0.3 in September to 0.9% in 2022 and from 1.0% to 1.6% for 2023. So…even though Powell says the economy is incredibly strong, in 2023 the FF guess is 1.6% vs inflation of 2.3%, i.e. continued negative, accommodative rates; likely a tailwind for risk assets. Once again, the Fed is catching-up to the market.
–The high one-yr euro$ calendar is EDH2/H3 at 90 bps, +1.5 on the day. Some of the deferred 1-yr spreads edged to new recent lows. For example, EDZ2/EDZ3 settled 59, down 4 on the day, and exactly the same amount as the FF guesstimate increase from 1.0% to 1.6%.
–I was struck by Powell saying a couple of times that he changed his mind to embrace an accelerated taper and hawkish pivot because of a strong ECI prior to the November meeting, followed by a robust labor report, followed by high CPI. Three data points. Granted, strong data…but the Fed has an elite professional staff for forecasting and estimating. This caught everyone off guard?
–Powell said “we’re two meetings away from finishing the taper.” I suppose it opens the door to a May hike; meeting is May 4. Interestingly, EDH2/M2/U2 butterfly was -1/-0.5 pre-FOMC and +0.5/1.0 afterwards, settling at 0.5. That is, EDH2/M2 at 22.0 and EDM2/U2 at 21.5. Does it really make sense that slightly more of a hike is priced into the first spread than the one behind it? By the way, EDM2/U2/Z2 fly settled -5.5.
–There was an early block of 30k FVH sold at 120-28.25. The contract settled at 120-260 with open interest up 72k. It’ll be interesting to see how the next auctions go at the long end. When asked about low US long-end rates, Powell’s best answer is that they are higher than most of the rest of the world; that long-end rates are low everywhere.
–News today includes BOE who will likely whiff, and ECB. I don’t have any idea why EUR isn’t at parity with USD! Jobless Claims expected 200k, Industrial Production and Housing Starts as well. Philly Fed expected 29 from 39.
