Post FOMC notes as Q2 GDP spells recession
July 29, 2022
–Post-FOMC notes as Advance Q2 GDP printed -0.9%. FFQ2 settled exactly 75 above the previous Fed Effective (EFFR) of 158 at 233 bps or a price of 9767.0. The October contract captures the next FOMC on Sept 21; FFV2 settled 9710.5 or 289.5. If the Fed goes 50 at that meeting Oct will settle 9717.0. Currently, the conversation is whether the Fed does 75 or 50, with a heavy lean toward the latter, but I expect a shift to include the possibility of just 25, which would be signaled by FFV2 trading above 9717 (though today’s inflation data may preclude that in the short term). The lowest contracts on the FF curve are Jan and Feb ’23 at 9674 or 3.26%. The lowest SOFR contract is Dec ’22 at 9678.0 or 3.22%, and the lowest ED contract is Z’22 at 9639 or 3.61%. The 39 spread between Dec SFR and ED is the turn effect….the other spreads pre-transition are 29. The market has clearly identified the end to the hiking cycle as occurring no later than the start of next year.
–5/30 treasury spread was 15 before the FOMC, popped up to 22 right after and closed at 33 yesterday. The curve steepened as future hikes are pared back. Same thing hit the USD and put a bid into precious metals. SIU2 closed +1.268 at 19.868 and GCZ2 +31.70 at 1769.20. Risk assets embraced the atmosphere and ESU2 ran to new highs, bolstered by after hours gains in AMZN and AAPL.
–Today’s news includes ECI expected +1.2% from 1.4. The Fed’s preferred inflation measure, PCE Core prices expected 4.7 from 4.7 last, however headline expected 6.8 from 6.3 last. Michigan 5-10 year inflation expectations expected 2.8, same as last with 5y breakeven 2.71% and the 10y breakeven 2.50%. Powell deemed the current 2.25 to 2.5% target as ‘neutral’ so a year-end or Q1 target of 3.25% (as reflected by current futures pricing) would thus have to be considered restrictive.
