If we weren’t in recession before, we are now
Sept 22, 2022
–As expected the Fed hiked 75 to 3.0-3.25%. New EFFR should be 308. FFV2 settled +4 at 9691.5. Projections were much different from my estimates. FF end of 2022 estimated at 4.4% which indicates another 125 bps in the next two meetings. FFF3 at 9575 is 4.25%, a spread of 116.5 to FFV2. That is, the Fed is slightly MORE aggressive than yesterday’s settles. By the end of 2023, the difference is even more dramatic. Fed fund projection is 4.6%, while FFF4 is 9587 (4.13%). Therefore, the Fed’s projections indicate another 20 bp rate increase in 2023, while the market perceives a tilt toward easing (FFF3/FFF4 settled -12). For the end of 2024, the Fed’s FF projection is 3.9%. So 2023 to 2024 indicates an ease of 70 bps (though the diffusion of dots for 2024 is fairly wide). The market is pretty much on the same page, though pricing indicates that rate cuts will come more rapidly than the Fed thinks. SFRH3/SFRH4 settled -65 (9550.5/9615.5) and SFRM3/M4 settled -78.5 (9556.5/9635), the latter spread being the most negative on the curve. The average of the two is right where the Fed is, an ease of 70 bps.
–GDP for 2022 was revised down to just 0.2 for 2022 and 1.2 for 2023. Both projections in June were 1.7. There have been a lot of badly missed estimates on inflation and growth, and my guess is that the unemployment rate will be wildly higher than the new peak estimate of 4.4% in 2023 & 2024. Let’s just follow the Fed’s trajectory of GDP for 2022. In December of last year, it was forecast at 4.0%. By March 2.8%. In June 1.7% and now 0.2%.
–New low in 2/10 at -48 bps. Stocks slumped to new lows as well. BOJ intervened in yen this morning, taking it from 145.5 to 142.5, as Japan’s continuing easy monetary policy undermines support for the ccy. SNB raised by 75. Short end of US curve is significantly lower this morning (higher rates) with the first two years of SFR contracts down 9.5 to 12.
