Settle in at 3% in a little over a year

March 23, 2023

–Powell went to great pains to say that the Fed’s goal is still squarely bringing inflation back to 2%.  He said that the banking issues will likely result in tighter credit conditions for households and businesses and therefore act as restraint in the same way as overt Fed tightening might, though it’s difficult to quantify.  He also said a few times that the US banking system is well-capitalized, and that depositors should all feel safe.  Undone immediately by Yellen who said the US is NOT considering a blanket guarantee for depositors.  Stocks immediately slid, hard, though bouncing this morning. 

–In terms of inflation, Powell again split it into three parts: Goods are seeing disinflation. In housing, new leases are being written at steady to lower prices.  However, the service sector is where the issues are.  Powell said the Fed’s base case does not anticipate the Fed cutting this year.  The market differs with that assessment. 

–Fed left the 2023 dot at 5.1 (indicating only 1 more hike) while the 2024 dot went up to 4.3 from 4.1.  So that would indicate Z3/Z4 at -80, and it actually settled -111.5, down 7 on the day (SFRZ3 9583, +18 and Z4 9694.5, +25).  SFRU3/Z3 three-month spread settled at a new recent low -32.5, down 7.5 on the day.  EFFR going into yesterday was 4.58% or 95.42 price equivalent.  FFJ3 settled at 9518.5 or 4.815%, very close to what should be the new EFFR of 4.83 or 4.82%.  There are three FOMC meetings in front of August: May 3, June 14 and July 26.  There is no meeting in August and FFQ3 settled 9533.5 or 4.665%.  In other words, the market is pretty sure this hike will be reversed in the next four months. Further out, the red pack (2^nd year) settled 9685, green pack 9697, blue pack 9694 and gold pack 9687 (all rounded).  So after this year, the next four years are pegged at a rate of just over 3%.

–On the Feb 1 FOMC there was a buyer of 50k SFRZ3 9550/9750cs for 33.5/35.  On yesterday’s pre-FOMC a new buyer of 15k SFRZ3 9650/9750cs for 17.0/17.5.  Settled 19.5.  

–Final thought.  Curve is still inverted.  Depositors are not covered.  More problems will crop up.

• ABOUT:
  Former member of the CME specializing in interest rate options and yield curve strategies.

  The risk of loss in trading futures and/or options is substantial and each investor and/or trader must consider whether this is a suitable investment. Past performance, whether actual or indicated by simulated historical tests of strategies, is not indicative of future results.