Big week for policy
March 6, 2023
–Powell before Congress for semi-annual testimony Tuesday and Wednesday. Payrolls on Friday. 3,10 and 30y auctions starting Tuesday. Fed’s Quarterly Z.1 Financial Accounts (HH Net Worth, Aggregate Debt levels) is released Thursday. Lagarde says ECB must do more to bring inflation under control.
–Strong rally in stocks and bonds on Friday. SPX +1.6%. Ten year yield reversed hard off Thursday’s recent high of 4.07%, closing down 11 bps at 3.96%. Non-mfg ISM a bit stronger than expected, but prices eased slightly to 65.6. Over the weekend Mary Daly gave a speech explicitly saying higher for longer:
Putting all of this together, it’s clear there is more work to do. In order to put this episode of high inflation behind us, further policy tightening, maintained for a longer time, will likely be necessary. Restoring price stability is our mandate and it is what the American people expect. So, the FOMC remains resolute in achieving this goal.
—5/30 at a new low -36.6 on Friday, with 2/30 at a historic low near -100 (-97.1 at futures settle). Ten year breakeven at new high for 2023 at 252 bps, having started the year around 215. Last year’s high was 302. One other interesting note as the transition in futures to 100% SOFR nears: SFRH3/EDH3 settled just 6 bps (9498.75/9492.75). The official transition is >20 bps different. Everything beyond Sept’23 is settling 26 bps. Sept’23 contracts are the lowest on the two strips. SFRU3 settled 9456.5 (or 5.435%) while EDU3 settled 9430.5 or 5.695%. Pretty juicy libor rate! Note that the high FF rate in the 2004/06 tightening cycle ended at 5.25%
From the FOMC statement June 29, 2006 (the last hike, but it wasn’t obvious from the statement)
The Federal Open Market Committee decided today to raise its target for the federal funds rate by 25 basis points to 5-1/4 percent.
Recent indicators suggest that economic growth is moderating from its quite strong pace earlier this year, partly reflecting a gradual cooling of the housing market and the lagged effects of increases in interest rates and energy prices.
Readings on core inflation have been elevated in recent months. Ongoing productivity gains have held down the rise in unit labor costs, and inflation expectations remain contained. However, the high levels of resource utilization and of the prices of energy and other commodities have the potential to sustain inflation pressures.
