Bank strains are unrelated to the inflation fight
April 4, 2023
–FED BULLARD: FED NEEDS RATES ABOVE 5%, HIS FORECAST IS ABOVE MEDIAN;
EXPECT INFLATION TO BE STICKIER, LABOR MARKET STRONG;
STRONG JOB MKT GIVES FED HEADROOM TO FIGHT INFLATION;
MARKETS `SHOULD LISTEN TO ME’ ON RATE OUTLOOK; MARKETS PUTTING TOO MUCH FOCUS ON BANKING STRAINS
–Bullet points from Bullard yesterday are above. One more hike would put funds above 5%, and May Fed Funds settled 9504, now indicating higher than 50/50 odds for a 25 bp hike at the May 3 FOMC (to 5.0-5.25%). Of course, banking and other strains are directly related to the Fed’s hiking campaign, but it’s all about inflation for Bullard. If the hiking in the pipeline should spark a collapse, he can always apologize, like the (former) head of CS or Sam Bankman-Fried. “Sorry. Was that wrong?”
–Of course, the market interprets Bullard this way: the more the Fed tightens now, the more it will have to ease…and soon. SFRM3 and U3 were the only lower contracts on the strip. SFRU3 settled down 1.5 at 9538. while SFRU4 settled UP 15.0 at 9686.0 (U3/U4 spread collapsed to -148). So Bullard says we need rates over 5% and yet the market pencils in rates late next year just above 3%. The Dallas Fed reported yesterday that “demand for bank loans in its districts slumped to the weakest since covid; worst back-to-back readings since the survey began in 2017”.
–A few of the near 3m SOFR calendars also made new recent lows. SFRM3/U3 is -31, U3/Z3 is -36 and Z3/H4 is -44.0. These spreads indicate that easing is expected soon and are a direct repudiation of Bullard.
–In treasuries, the 2yr led yields lower. 2y down 8 bps at 3.982%…(was as high as 5.07% on 3/8). Tens fell 6.4 bps to 3.43%.
–CLK3 settled +4.75 at 80.42 on OPEC production cuts. We can always tap the SPR, right?
–A few large trades, mostly exits:
–SFRM3 9575c cov 9509, 20d at least 50k sold 9.0 (exit)
–SFRM3 9506.25/9537.5 strang bot 24k vs -8k SFRZ3 9562.5^ net 11.5/12.0 (exit)
strangle settled 32.75 * 3 is 98.25 while SFRZ3 9562.5^ settled 109.25; 11.0 in pkg
–SFRJ3 9506.25/9512.5cs cov 08.5, 10d all day 25k sold 2.25
–SFRK3 9606.25/9456.25ps 40k paid 15-16 (this one is new)
