50? Not so fast…
February 17, 2022
–A couple of interesting quotes from the minutes:
“…participants generally noted that current economic and financial conditions would likely warrant a faster pace of balance sheet runoff than during the period of balance sheet reduction from 2017 to 2019. Participants observed that, in light of the current high level of the Federal Reserve’s securities holdings, a significant reduction in the size of the balance sheet would likely be appropriate.”
[probably negative for stocks…but…]
“…some also noted that SOMA redemptions would require significant adjustments to private-sector balance sheets, as investors absorb the net increase in Treasury and agency MBS issuance to the private sector and money markets transition to lower levels of liquidity, and that these adjustments could take some time.”
[So, it might not be particularly smooth sailing, and I am just adding my own thoughts here…ESPECIALLY IF FF HIKES HAVE FLATTENED THE CURVE & REMOVED THE LURE OF POSITIVE CARRY FOR THE PRIVATE SECTOR]
And here’s a passage from the staff summary:
“The staff provided an update on its assessments of the stability of the financial system and, on balance, characterized the financial vulnerabilities of the U.S. financial system as notable. The staff judged that asset valuation pressures remained elevated. In particular, the forward price-to-earnings ratio for the S&P 500 index stood at the upper end of its historical distribution; high-yield corporate bond spreads and the excess loan premium for leveraged loans remained at low levels; and house prices grew strongly, with price-to-rent ratios that were at elevated levels. The staff noted that the market capitalization of crypto-assets had grown significantly over the past decade and had experienced considerable volatility, including sizable declines since late last year.”
Just how aggressive does the Fed want to be if conditions are already vulnerable?
–Rates were little changed on balance yesterday. Tens essentially unchanged at 2.04%. Now it’s all shifting back to Ukraine. Gold is $1888/oz this morning (GCJ) the highest level since June. Curve continued to bounce from its recent drubbing with Brainard and Williams speaking tomorrow. There seems to be some second thoughts about the first move being 50 bps. Red euro$ pack gained 4.125 bps while blues were unch’d (2nd year and 4th year). Heavy selling in April FV premium. As the front-loaded hiking scenario had gained traction FV vol outperformed to the upside in treasuries. Yesterday the pushback: FVJ vol fell 0.3 from 4.3 to 4.0 with new sales of 25k in both FVJ 117.75c (settled 0’23 with OI +27k) and 117.25c covered from 43.5 to 42. Settled 0’38 with OI +23k.
–Job Claims and Philly Fed today.
