Dots and Dissent
June 13, 2023
–How does the Fed ‘skip’ but convince the market that easing is a long way off? Powell can convey that message at the press conference. Could a change in ‘dots’ in the SEP help? In both December and March the end-of-2023 dot for FF was 5.1%. The Fed has reached that goal. I think it’s rather unlikely that the ’23 dot could move up, though 7 members had estimates above 5.125 in March: 3 at 5.375%, 3 at 5.625% and 1 at 5.875%. Somewhat hard to move that needle. However, moving the end-of-2024 dot up might send a message. The dots were diffuse in March, from 3.375% to 5.625%. Could this dot move to 4.625% as a median? It was 4.1% in December and 4.3% in March. I think it’s possible, though not likely. What about dissents? I think there is a small chance of dissent by Logan, Waller and Bowman. All appear concerned that inflation remains too high.
Waller on May 24: On Friday, we will be getting April inflation data based on personal consumption expenditures and then May CPI data on the first day of the FOMC meeting. These are two critical pieces of data I will be looking at between now and the June FOMC meeting to learn more about inflation dynamics and if we are seeing some easing in inflation pressures.
Logan on May 18: As of today, though, I remain concerned about whether inflation is falling fast enough.
Bowman on May 12: Should inflation remain high and the labor market remain tight, additional monetary policy tightening will likely be appropriate to attain a sufficiently restrictive stance of monetary policy to lower inflation over time. I also expect that our policy rate will need to remain sufficiently restrictive for some time…
–CPI today expected 4.1 yoy vs last at 4.9. There’s a projection of a much lower number next month by Credit Suisse due to base effects. Core CPI expected 5.2 vs 5.5. China cut its 7-day repo by 10 bps today, CNY trades 7.15 its weakest level since last November, with Xi continuing to advise the Chinese to prepare for ‘worst case’ scenarios. Financial Times today leads off with this headline: ‘US junk loan defaults surge as higher interest rates start to bite. Total this year exceeds 2021 and 22 combined…’
–Current EFFR (Fed effective) is 5.08%. On a hike it will move to 5.33. FFQ3 settled yesterday at 9469.5 or 5.305%. So even with talk of a skip tomorrow, the market leans heavily toward a hike either Wednesday or July 26. SFRM3/SFRU3 settled at a new recent high of -0.5 (9473/9473.5). A month ago on 11-May the spread was -36 (9494.5/9530.5). The Fed has successfully conditioned the market to believe there will be no ease through Q3, at least. “Sufficiently restrictive.” Further out, SFRZ3/Z4 one-yr calendar settled -149.5 (9495.5/9645), projecting significant easing over that year. Dec’23/Dec’24 is the most inverted one-yr calendar on the strip. Can the Fed prevent runaway easing of financial conditions (most notably a ripping stock rally)?
–July WTI (CLN3) was 67.24 late yesterday, down 2.93 and getting nearer to the lowest level of this year, which was just over $64/bbl.
