We’re now restrictive, but must hold until the job is done
August 24, 2023
–The Fed Effective rate is 5.33% or 9467.0. FFX3 (Nove Fed Funds) captures the next two FOMC meetings, Sept 20 and Nov 1, and remains pegged between 9456 and 9460. At yesterday’s settle of 9456.5, it’s close to 50/50 for another 25 bp hike at one of the next two meetings. FFX3 is the lowest contract on the FF strip. Going into Powell’s speech at Jackson Hole tomorrow, the market accepts the idea that rates are currently restrictive and are close to the final destination if not already there. The question has shifted to duration of restraint before the next easing cycle begins.
–FFX3/FFX4 settled at -97 bps (9456.5/9553.5) indicating nearly 1% of ease over that year. FFK4 (May) at 9488.5 or 5.115% is the first contract more than 25 bps above FFX3 (lower in yield), and is nearly ¼ pct below the current Fed Effective.
–At the last Jackson Hole conference, FF were 2.25 to 2.5% vs the current 5.25 to 5.5% target. Powell gave a short talk, outlining three lessons from the past. First, the central bank is responsible for price stability, and the Fed MUST return to its 2% target. Second, inflation expectations are a big part of the equation, so the Fed needs to make sure they remain moored to avoid a price/wage spiral. Third, the Fed must keep at it until the job is done.
–In my opinion, there is little chance of moving the inflation target. With the ten-yr inflation-indexed note yield near 2% and FF above all levels of inflation, it’s a matter of time and not level. Powell speaks at 10:00 tomorrow, with Lagarde making comments afterward.
–The curve flattened yesterday with a continued rally in longer maturities. Tens were down 13 bps to 4.196% and 30s down 12 bps to 4.281%. On the SOFR curve reds through golds (SFRU4 thru SFRM8) were up 12 to 15 bps. NVDA blew away estimates, leading to a huge after-hours bid in Nasdaq.
–News Thursday includes Jobless Claims expected 240k and Chgo Fed National Activity which has declined the past two months.
