NEUTRAL! (then ease)
April 27, 2022
–SPX fell 2.8% yesterday, down 121 to 4175.20, and has now completely reversed the torrid short covering rally which followed the March FOMC. As mentioned in yesterday’s note, the market is starting to suspect the Fed will fold like a cheap suit if equity market weakness persists. Here are some changes in rate markets yesterday: EDM2/EDM3 one-year calendar spread settled at a new recent low of 152.5. This is down an astonishing 30 bps from last Thursday’s high of 182 (so one hike erased). January 2023 Fed Funds, which prices aggregate hikes through the end of this year settled 9731.0 or 2.69%. The low settle last week was 9717. Measured against the current EFFR of 33 bps, FFF3 projects 236 bps of hikes through the end of year, easily within majority estimates of “neutral”, However, FFF’24 settled 9696.5, only 34.5 bps higher in yield, meaning that the market looks for a quiet Fed through 2023. In fact, as the attached chart shows, July’23/Jan’24 Fed Fund spread has inverted, settling at -6.5. That is, the yield on the July contract is higher than it is projected six months later. This period covers 4 FOMC meetings, and reflects a bias toward easing BY THE SECOND HALF OF NEXT YEAR. In eurodollars, EDM3/EDU3 settled at a new low of -7.0 (9661.5/9668.5). Same message. SFRM3/SFRZ3 settled negative 12. Same message again. Bullard has had his day in the sun with tightening bravado, but it’s going to be Powell who gets in front of reporters and stoically tries to say that asset prices don’t matter, until he’s forced to pirouette like a ballerina as he did at the end of 2018.
–GOOGL got spanked after the earnings report, shaving over $100 billion of market cap off the stock, or a couple of TWTRs. TSLA lost a couple of TWTRs as well. This morning the major indexes are seeing a modest bounce. Shifting away from paper assets, it’s worth noting that July Soybean Oil is at a new high of 84.20 this morning, nearly triple its price from 2 years ago.
–Five year note auction today. Pending home sales. Earnings from FB, CME, Boeing, Bunge, and Spotify. Bunge is up 35% since the start of December, while SPOT has lost 2/3rds of its value since November.
