Fed Day. Get ready for tough Powell
December 13, 2023
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–Not much change in yields yesterday as CPI came out essentially as expected. Headline m/m was +0.1%, yoy 3.1% and Core 4.0%. Ten year yield fell nearly 3 bps to 4.208%. The curve flattened marginally, just enough to notch a new recent low in 2/10 spread at -52.3. On the SOFR curve reds to deferred contracts also made new lows on spread, for example, the red to green pack spread settled just under -35 (9613.0/9648.125). After Friday’s expiration, the new red/green pack spread will start with H’25 and H’26 contracts and that spread settled yesterday at -17.25 as the Z4/H5 spread is -29.5.
–Moving on, the event of the day is the FOMC announcement and press conference. The last FOMC was Nov 1, where rates were held steady, and the subsequent employment report on Nov 3 was weak. Since that time, as just about every pundit has noted, financial conditions eased substantially. Below are rough levels on Friday, Nov 3 vs yesterday’s
2y 4.83 to 4.73 (10 bp drop)
5y 4.49 to 4.23 (26 bp drop)
10y 4.55 to 4.21 (34 bp drop)
30y 4.75 to 4.33 (42 bp drop)
SPX 4358 to 4643 (over 6.5% gain)
DXY above 105 to 104
HYG 74 to 76 (high yield etf, rough proxy for spread)
WTI 80.50 to 68.61
This list isn’t meant to be exhaustive, but in October, Fed officials uniformly said that tightened financial conditions likely meant that the Fed didn’t have to be as aggressive (as tens had hit 5%). The script has flipped. At the same time, the US federal gov’t is pumping out stimulus thru deficit spending — November’s budget deficit released yesterday was 314 billion. Powell almost HAS to lean against easier conditions.
Argentina’s new Economy Minister Luis Caputo said yesterday “There is no more money.” Could never happen here, right?
–The Sept FOMC projections for 2024 were:
Unemp 4.1%
Core PCE prices 2.6%
FF target 5.1%
My guesses are 4.3%, 2.6% and 4.9%.
–Yesterday featured continued targeted call buying. Looking for modest easing in Q1/Q2
+12k SFRJ4 9525/9550/9575c fly 3.0
+20k SFRJ4 9475/9500/9531.25 broken call fly 3.25
+5k SFRH4 9487.5/9500/9512.5/9525c cond 1.75
+5k SFRK4 9500/9512.5/9525/9537.5c cond 2.0
