Is 150 bps six cuts?
January 23, 2024
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–Yields eased in quiet trade on Monday; SOFR curve became slightly more inverted. For example, SFRM4 was unch’d at 9527, but M5 was +4.5 at 9653.5 and M6 was +6.5 at 9665.5. SFRM4/M5 settled -126.5. For the past month on settlement basis it’s been between -120.5 and -131.5. The most inverted one-year spread is the front SFRH4/H5 at -148.5. Near one-year calendars: FFG4/G5 is -150, SFRH4/H5 is -148.5, FFJ4/J5 is -154 and SFRM4/M5 is -126.5. The unsurprising conclusion by analysts is that there will be about 150 bps of ease over the year. The January meeting is NOT priced for an ease, and there are 8 FOMC meetings a year, so that pretty much means an ease of 25 bps at every meeting after Jan. While the 2004/2006 tightening cycle followed the 25 bp per meeting schedule, easing tends to be a bit more disjointed.
–There was an interesting Odd Lots podcast (BBG) with Jason Cummins, chief econ at Brevan Howard. His bias is that the Fed will begin to ease, that the labor market is weaker than it appears, and that inflation is likely to undershoot the Fed’s expectations. He notes that in June’23 the Fed’s projection for Core PCE was 3.9% for year end, and it actually finished at 3.2%. The point is that it was a fairly large miss from the Fed. Key points are 1) the Fed has a deep aversion to being forced into quick policy reversals. 2) The employment part of the dual mandate is becoming much more important and 3) the 2007/2008 experience may provide a reasonable template for this year.
–BOJ kept policy steady but noted a gradual firming of inflation. China is unleashing new measures to support its relentlessly offered stock market. Today’s US news includes Philly non-mfg which was 6.3 last. Two-year auction today, wi was 4.34% at the time of futures settlement.
–Yellen slated to give a speech touting the administration’s infrastructure spending/success on January 25, Thursday. FOMC is Jan 31, as is the Quarterly Refunding Announcement.
