Fed hikes 75 but Powell scales back hawkishness
July 28, 2022
–Fed hiked 75 as expected. Powell mentioned growth risks a couple of times and said FF are now around neutral. He also said that at some point it will be appropriate to slow the pace of rate hikes.
–Aug FF settled 9766.5, just 0.5 away from the new EFFR 233 bps. Oct FF captures the September 21 FOMC and settled 9709 or 291, 58 over 233, so that contract currently favors 50 at the Sept meeting rather than 75…and will likely edge even closer to 50 (towards 9717). Not only did Powell acknowledge slowing conditions, but news of Manchin cutting a deal with Schumer in part to cut government debt is a negative for growth.
–SFRZ2/SFRZ3 that traded -63 on a 67k block Tuesday was -49 late in the day Wednesday. Nice anticipation of the front month rally reflecting pared back tightening expectations.
–On the futures close I marked 5/30 at 20 bps, from just under 15 right before the FOMC. By the end of the day it was 22. Back end doesn’t feel comfortable with the idea of the Fed easing up on the inflation fight. USD eased. Precious metals firmed from depressed levels.
–On the other hand vol was smashed as the big event of the week came and went. For example, on Tuesday 0EZ 9700^ settled 85.5 and EDZ3 9700^ settled 145.75 vs the underlying at 9694.5. Yesterday the futures settled 9700, and the 0EZ 9700^ settled 81.5 (down 4 on the day) while the long dated EDZ2 straddle settled 139 (-6.75).
–Today’s news includes Advance GDP for Q2, expected slightly positive but could easily print negative. AAPL and AMZN earnings post-close.
