Powell today
April 21, 2022
–From SF Fed’s Daly yesterday (BBG)
“I see an expeditious march to neutral by the end of the year as a prudent path,” Daly said Wednesday in a speech in Las Vegas, noting that most forecasters see that level lying around 2.5%. “Moving purposefully to a more neutral stance that does not stimulate the economy is the top priority.”
–Yesterday Jan’23 FF contract settled 9740.5 or 2.595%. EDZ2 settled 9702.0 or 2.98%, and Dec SOFR (SFRZ2) was 9734.5 or 2.655%. The market has priced Daly (and Evans) already. In fact, EDZ2 at 2.98% is 14 bps higher than the 10yr treasury (2.842%, down 7 bps on the day) and 8 bps higher than the 10-year swap (2.90%). Therefore, the market has priced an aggressive Fed for this year into 2023, but continues to see a terminal rate at or below 3.5%. The lowest ED contract is still EDM3 at 9650.5 and the lowest SOFR contract is U3 at 9678.0. That’s with Core PCE deflator at 5.4%, so if inflation doesn’t recede, a supposedly ‘neutral’ of 2.5%, and a ‘terminal’ of 3.5% would continue to be negative real rates.
–The curve flattened yesterday on the hawkish comments, with 2’s unchanged and 30’s down 10.6 bps to 2.863%, helped by a strong 20y auction. Today we have Powell’s take on things.
