Fasten your seatbelts
October 14, 2022
–Staggering moves associated with yesterday’s CPI. ESZ and NQZ had key reversals: new lows early, outside days, huge ranges, closed near the highs of the session; SPX up 2.6%. This price action indicates that selling pressure has come to an end. However, these signals have not been effective recently. I would only conclude that buyers and sellers are likely more balanced going forward.
–The curve flattened hard given 8.2% CPI with 6.6 Core. SFRM3 was the weakest contract on the strip, settling down 22.5 to 9520.5. The red pack in dollars closed -14, as did SOFR reds, but blue packs (4th year forward) were slightly higher on the day. Two year note jumped 16.4 bps to 4.45%, while tens were only up 5.4 to 3.952%. 2/10 spread is inverted by about 1/2%. Long end of the curve having a hard time getting over the 4% hurdle.
–November FF contract, which is the clearest signal for the Nov 2 FOMC, settled 9618.5, down 5 on the day, pricing MORE than a 75 bp hike. On 75 bps, the contract will settle 9622.0 (two days at EFFR 308 and 28 days at 383). The lowest contract on the FF strip is April, which settled 9511.5 (4.885%), down 21.5 on the day. EDH3 and SFRH3 remain the lowest on the strips, at 9487.0 (5.13%) and 9515.5 (4.845%). The timing for the end of the Fed’s tightening hasn’t really changed; it’s still expected to be either December, or at the first meeting of next year on Feb 1. However, the magnitude of upcoming hikes ratcheted up by about 1/4%. A lot of commentators have recently criticized the Fed for the rapidity and size of hikes. For example, el-Erian said the Fed slammed on the brakes and is putting the economy through the windshield. Clearly financial stability issues are growing, but as el-Erain said yesterday, the numbers were hotter than expected…bad news for the Fed. I’ve focused on the SFRZ2/EDZ2 spread which surged to 45.5 yesterday, but came back to settle 40.5. Like the TED spread of old, this spread gives some indication of global banking stress as the ED side settles to libor. JPM, MS, Citi and Wells all report today. Never thought we’d see a 5% (sub-9500) price on near eurodollars again, but here we are!
–Retail Sales today, expected+0.2% on the month.
