Pivot accentuated
January 19, 2023
–Data released Wednesday was uniformly weak. Retail Sales were -1.1% (expected -0.8). PPI, expected -0.1 was -0.5, with yoy 6.2 vs expected 6.8 and Core 5.5. Industrial Production was -0.7. Negative job announcements continue, with MSFT cutting 10k, BofA freezing hiring. Against this backdrop Bullard once again said the Fed needs to get funds above 5% as fast as possible. Perhaps unsurprisingly, the near 1-yr SOFR calendars made new lows. The most inverted, U3/U4 settled -177 (9536/9713) down 11.5 on the day. New historic low for the cycle. H3/H4, the first slot, settled -115.5 (9518/9633.5). Longer yields plunged, with uncharacteristically strong demand for yesterday’s 20y auction. 5’s fell 17.4 bps to 3.433%, 10’s down 15.8 to 3.373% and 30’s down 10.2 to 3.542%. Market perceptions of a forward ease helped 5/30 spread pop to a new recent high of 10.9, testing the high from Nov.
–Closer in on the SOFR curve, SFRM3/U3 (June/Sept 3m spd) settled-19.5. Previously I had highlighted this spread as there had been a huge buyer of approx 50k at -19 on Dec 23. By Jan 5 it rallied to -12.5 in a sign that Fed officials might actually be able to hold rates at the ‘terminal rate’ through year-end. The rhetoric from the Fed hasn’t really changed much, but the curve (thru inverted sprds) is saying loud and clear that eases are coming, and they are coming this year. And, in a side note, while treasury vol was lower, SFRZ3 moved to a higher strike of 9575 (9575.5s) but the straddle settled 74.5 vs 70 for the 9562.5^ Tuesday.
–So…..good for stocks right? Bad news is good news because of looser monetary policy in the future? Um, not this time. SPX -1.56% and Nasdaq Comp -1.24%. I own a couple of what I consider defensive stocks, Kraft (KHC) smoked by 6.3% and Altria (MO) -2.55%. Not quite sure how to interpret those moves (other than, ‘they’re out to get me’) but could it all be a sign of a consumer that is running on fumes? I am starting to feel like it’s the end of 2018, when Powell said ‘we’re a long way from neutral’ with respect to future hiking plans, but stocks tanked and the Fed was forced into a pivot in 2019.
–News today includes Housing Starts 1.358m, Philly Fed, -11 vs -13.8 last, and Jobless Claims expected 214k.
