Pushing the ease back
February 5, 2024
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—Friday’s blowout NFP at 317k caused an implosion in rate futures. Weakest SOFR contracts were Dec’4 and March’5, both settling -23.5 at 9595.5 and 9626.. SFRH6 settled -20 at 9666.5 and H7 -18.5 at 9659, so inversion was accentuated slightly from reds back. The five-year yield jumped nearly 20 bps to end 3.993%, while tens rose 17 to 4.031%. This week features auctions of 3s, 10s and 30s beginning tomorrow. Many have expressed skepticism about the strength of Friday’s data. The workweek was only 34.1 hours, near the depths of covid.
–April FF are the best indication of March 20 FOMC odds; settled 9473 or 5.27%, as compared against current EFFR of 5.33 or 9467. At Wednesday’s press conference, Powell suggested the Fed would not likely have the confidence to cut in March, which he repeated in the 60 Minutes interview aired yesterday. In today’s session, the low so far in FFJ4 is 9471.5 and the low in SFRH4 is 9474. Rate cut odds have been substantially squeezed out of March, and of course rates across the curve have shifted higher. TYH4 settled 111-21 on Thursday and this morning has posted a low of 111-04; the low in 2024 has been 110-26 on Jan 19. SFRZ4 this morning prints 9587.5, which is still about 125 bps above the SFRZ3 price in mid-Dec, but the market is coming a little bit closer to the “three cuts in 2024” implied by the dots.
–In the 60 minutes interview, Powell said, “We looked at the larger banks’ balance sheets, and it appears to be a manageable problem”, referring to CRE valuation issues. Powell openly admitted that the Fed whiffed on SVB. Many have noted that in the December FOMC statement, the second paragraph started with the sentence, “The US banking system is sound and resilient.” That line was absent in the Jan 31 statement. Lower rates and a positive curve would help nurse regional bank balance sheets back to health, but Powell clearly stated the Fed does not take political considerations into account during FOMC deliberations, so the lifeline of lower funding costs for regionals is a little farther away..
–News today includes ISM Services, expected 52.0 from 50.8 last. Bostic speaks at 2, and there are Fed speeches throughout the week. Today also includes the Fed’s Senior Loan Officer Survey at 2:00, which could be important with respect to credit conditions and CRE.
