Lean against politicization
February 1, 2024
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–Powell said repeatedly the Fed is committed to its 2% inflation target, a direct repudiation of those who would accuse him of easing policy to help someone else defeat Trump. Stocks were already pressured by GOOGL results released Tuesday post-close, and by NYCB opening 45% lower, but the real downside acceleration came after Powell said the central bank is unlikely to have enough confidence about inflation to cut rates as soon as March. SPX ended -1.6% while Nasdaq Comp fell 2.2%.
–The 50/50 level for an ease or hold is 9479.5 on April Fed Funds. (9467 for hold, 9492 for ease). Yesterday’s range was 9476 to 9486.5, but this morning’s trade is 9476.5, closer to the current 5.33% EFFR of 9467.0. The employment part of the dual mandate, which has now become more balanced with inflation in terms of policy implications, will be on display tomorrow with NFP expected 180k. One interesting aspect of Powell’s comments yesterday was a subtle rejection of rules based policy-making. Powell said he leans heavily on anecdotal information gathered from business connections throughout the reserve system. Soft vs hard data.
–The refunding announcement features large increases in 2, 3, 5 and 10y auctions (up $9b per month in 2s and 5s relative to last qtr). 30y bond is only up $1b (attached link below).
–NYCB, the proud buyer of Signature Bank assets, closed down 38% yesterday after a dividend cut. KRE, the regional bank etf closed -5.8%. It was the regional bank crisis in March which sparked a huge short-end rally based on potential rate cuts – which never came. The Bank Term Funding program was instituted at that time to subsidize the banking system back to health. Right after the announcement that BTFP is not being renewed, a lingering flare-up of questionable asset values is again sweeping regionals. Large lay-off announcements and banking issues will clearly keep hopes alive for a March rate cut, though if those factors are the ultimate reason for cuts, stocks likely won’t be cheering the decision.
–Note that the Fed’s dots from the Dec SEP projected 3 eases by year end 2024. SFRZ4 settled 9617.5 or 3.825%, or 150 bps below the current EFFR. The 9700c, 82.5 otm, settled 21.0 with 26 delta. The 9537.5 put, 80 otm, settled 12.0 with 21 delta. That put strike approximately represents three 25 bp eases from the current level. Clearly the market remains attentive to the possibility of bad things happening which will cause big cuts.
–Today’s news includes Jobless Claims expected 212k. ISM Mfg expected 47 from 47.4. Payrolls tomorrow expected 180k. Earnings this afternoon by AAPL, AMZN and META.
