Blowout NFP causes further inversion
August 9, 2022
–Blowout NFP 528k with 3.5% rate and yoy AHE 5.2% vs expected 4.9%. June Consumer Credit was released at the end of the day at a whopping $40.15b. EDM3 was the weakest contract, closing down 24.5 at a price of 9627.0. On the euro$ strip, EDZ2 is the lowest contract at 9603, close to 4%, and on the SOFR strip, H3 is the lowest at 9639. FFV2, which captures the Sept FOMC, settled 9698.5 or 301.5. If the Fed hikes 75 in Sept, the new EFFR will be 308. Getting close.
–There was chatter of an emergency Fed hike which caused FFQ2 to trade 9764, 3 bps above the current 233 EFFR. Settled 9765.75.
–Red euro$ pack (2nd year forward) settled 9676.75, down 22.625 on the day. New lows in all spreads from reds back: red/green (2nd to 3rd yr) settled -44.25, and red/gold (2nd to 5th) settled -50.625. 2/10 treasury spread closed at a new low of -41. The more aggressive that hikes are perceived going into year-end, the more the curve inverts. Curve inversion is indicative of what used to be called a recession. Although Mary Daly last week said the market was getting ahead of itself in terms of pricing future easing from the Fed, FFF3/FFF4 settled -45.5, a transparent marker of how much easing is priced for next year. (9643.5/9689.0). FFF3 settled 9643.5 or 356.5, about 1.25% higher than current EFFR. Jan’23 encompasses the next three FOMC meetings: Sept 21, Nov 2 and Dec 14. So if they’re putting in 75 for Sept, it doesn’t leave much for the other two.
–CPI Wednesday.
