A little over 3%
June 27, 2022
–EDU2 on Friday settled +6 at 9675.0. EDU4 settled -6.5 at 9687.0. (Two years apart and nearly the same price). The curve steepened as UofM’s longer term inflation expectation number was revised down to +3.1% from the mid-month initial print of 3.3%. Of course, the 3.3 release was a major factor in the decision to hike by 75 bps, with the sudden Fed realization that inflation expectations were becoming un-anchored. (NO ONE could have seen that coming). The other revision concerned UofM’s Consumer Sentiment, which notched a historic low of 50 (from initial mid-month 50.2). From the survey director Joanne Hsu, “The final June reading confirmed the early-June decline in consumer sentiment… Consumers across income, age, education, geographic region, political affiliation, stockholding and homeownership status all posted large declines.” Perhaps the revision lower resulted from the survey responses of some crypto bros: On June 10, BTC was 29000, a week later it was 20500…. which might have the effect of deflating a puff of confidence.
–Back to the euro$ curve. The market is still leaning heavily towards the idea of another 75 bp hike one month from now on July 27. That would put the funds rate at 2.25 to 2.50%, where it topped out in 2018. However, Fed officials mostly talk about a level at around 3.25% for neutral, and hope to get there by year end. So, after July, there are three more FOMC meetings for a cumulative 75-100 bps. Long-term expectations in the eurodollar curve synch-up with this idea. EDU2 settled 9675 or 3.25%. The red pack (starting with EDU3) settled 9666.75 or 3.3325%, the green pack (starts EDU4) settled 3.095%, blue pack (starts EDU5) at 3.11% and the gold pack at 3.2175%. It almost appears as if the financial markets are smugly certain of how things will play out, but I’ll guarantee that some of those levels are ultimately going to be very wrong. Note that the EDU4 9687.5^ is 184 bps.
–So, which ones are wrong? I don’t know. If I knew I wouldn’t be writing this
