A couple of post FOMC notes
June 16, 2022
–SNB surprise 50 bp hike from -0.75 to -0.25. Fed hiked 75 of course, so new Fed Effective should now be 158 bps. August FF settled yesterday at 9773.0, up 3.5 bps to 227 bps. Powell said the August meeting is likely to be either 50 or 75. If 50 new EFFR would be 208 or 9792 and if 75 then 233 or 9767. The market leans towards another 75, but deterioration in the economy and in stocks will likely see FFQ2 trade the midpoint at around 9780.
–EDH3/EDM3 settled negative 8. EDH3 settled 9587 and EDM3 at 9595. So, March is now the lowest contract on the strip, i.e. the end of hiking and timing for recession has moved forward. FFF3/FFF4 settled negative 5, 9641 and 9646. A price of 9641 or 3.59% on FFF3 indicates 200 bps of additional hikes over the next four FOMC meetings. Atlanta Fed GDPNow for Q2 is projecting 0.0 from 0.9 last. Ford says auto loan delinquencies are moving higher.
–By the way, the HIGHEST priced contract on the ED strip yesterday was 9660 or 3.4% and that’s EDU’25. Currently the market feels that Fed Funds above 3% will be sustained.
–Interesting projections out of the Fed. The majority of ‘dots’ see Fed Funds at 3.25 to 3.5% by year end, and 3.5 to 4% by the end of 2023. Obviously the economy should slow…that’s what the goal is: to crush demand. Therefore the change in GDP was revised lower from the last projections in March. For 2022, March was 2.8 and is now 1.7, and for 2023 March was 1.9 and now 1.7. The projections therefore are solidly indicative of a Fed engineered slowdown which will squeeze inflation out of the system, as can be seen by the estimates. In March, PCE inflation was 4.3% and now, as actual data can no longer be denied, the number is 5.2% for end of 2022. BUT, for 2023 and 2024 the estimates have been revised LOWER, from 2.7 in March to 2.6 for end of 2023, and from 2.3 to 2.2 for 2024. In the press conference, Powell said the Fed “…is not trying to induce a recession”. I guess that’s fair, but it’s coming in any case. And BBG leads off with this asinine headline: The Big Take: US Faces Fed-triggered Recession That May Cost Biden a Second Term. That’s nice, laying the blame for Biden’s gaffes at the doorstep of the Fed. It’s true that the US faces a Fed Triggered Recession…JUST STOP THERE. Political bias? nah…just good solid objective reporting.
–One last note. The market projection for year end FF is now 3.59% (as seen in January Fed Funds). Dec SOFR future settled 9638 or 3.62%. That is, as of yesterday’s close, the Fed dots and market prices weren’t all that far away.
Bloomberg:
Powell Sets Path to Restrain Economy and Stop Runaway Inflation
The Big Take: US Faces Fed-Triggered Recession That May Cost Biden a Second Term
