A few notes
October 11, 2023
–Several Fed speakers have suggested that tighter financial conditions/higher long-end rates are mitigating the need for the Fed to continue raising short term rates (Logan, Jefferson, Bostic). Daly said yesterday that the nominal neutral rate is likely between 2.5% and 3% “2% inflation plus 0.5 real rate”. I would mention that the 10y inflation-index yield is currently 2.33%, so the 0.5 “real rate” is probably a lot higher. However, Bowman this morning said inflation above target may mean the Fed needs to keep hiking….before listing a string of financial system vulnerabilities (banks, CRE, the treasury market) that could keep the Fed on hold or tilt toward a lower policy rate. Risk assets have taken the message and continue the bounce from Monday morning. Surprisingly (in my opinion anyway) the long bond yield is also falling, down to 4.828% on Tuesday. I did mark 5/30 at a slight new high of 21 bps. If the Fed is done and Biden opens the checkbook for defense spending, then long end rates should have a near term floor.
–NFIB small business optimism, was released yesterday at 90.8. This isn’t a particularly big data point, but it’s still notable that it’s essentially at the same level as the beat low of the pandemic in 2020. I would personally place greater emphasis on NFIB than on consumer confidence surveys. Today brings PPI expected 0.3% and 0.2% core m/m. YOY expected 1.6% from 1.6% with Core 2.3 vs 2.2. Ten year auction (3’s tailed about 1.5 bps yesterday) and the FOMC minutes. Waller speaks again today, and given all the recent comments from Fed officials the minutes are likely meaningless. A lot has changed since Sept 20.
–FFF4 settled 9460 or 5.4% vs current EFFR of 5.33%. There are two meetings prior to this contract, Nov 1 and Dec 13, so obviously the current level leans toward the Fed being done. Implied vols pulled back from Monday’s strong closes. For example SFRU4 9625^ settled 104.5, down 3 from Monday’s settle and front SFRZ3 9456.25^ settled 17.75 from 20.25 with the future down only 0.5 to 9458. It feels like market makers are trying to paint marks lower, for example yesterday treasury straddles lost 1 to 1.5 64’s in the last five minutes prior to official settles.
