Eases dialed down to quarter point increments
October 7, 2024
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–On September 24, FFG5 settled 9631 or 3.69%, 114 bps below the current Fed Effective rate of 4.83%. This contract captures the next three FOMC meetings. On the attached chart, I’ve marked eases in terms of 25 bp increments. Obviously, with the contract having settled -20 on Friday at 9592.5, one ease came out. This morning there is follow-through from Friday’s sell-off, with the contract down another 5 at 9587.5. If the Fed were to ease 25 bps at the Nov, Dec and Jan meetings, the final settle would be 9592.0 (right at Friday’s level). November FF settled 9537.0, and would settle 9536.17 on a cut of 25. So, even though the first cut was 50, Friday’s NFP of 254k has dialed down future cuts to quarter point increments.
–As mentioned over the weekend, there were huge declines in SOFR open interest, with SFRZ4 shedding 184k contracts or 14% of open contracts. Recalibration continues this morning with SFRZ4 down another 5.5 to 9571 (was -15.5 on Friday). SFRM5, which was the weakest contract on Friday, -28.5 at 9639.5, is down another 8 at 9631.5. Clearly some of the price action is simply forced liquidation.
–Curve flattened hard, with the 2yr yield up 21.6 to 3.928% and 10y up 13.3 to 3.981% 2/10 closed at 5.3 bps coming off a high of 23 on Sept 25. As previously mentioned, that area is essentially the halfway point between the 2021 high of 158 and the 2022 low of -109. Will likely hold between -10 and -5.
–Consumer Credit this afternoon. Several Fed speakers including Bowman and Kashkari. Auctions of 3s, 10s, 30s begin tomorrow. CPI Thursday.
