Fed has the ability to approach policy carefully. Uh-oh
November 15, 2024
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–Knee-jerk selling of rate futures on higher than expected PPI, 0.2 with Core 0.3 m/m. Then prices reversed. TYZ4 109-04+ on the number, then back up to 109-24+ pre-Powell, then to 109-08 post-Powell.
–SFRZ5 9600p seller of 40k at 37.0 covered 9614.5, 42d. SFRZ5 9612.5^ settled 90 on Wednesday and immediately traded 88.5 after put sale, where it settled. 9600p settled 38.25 v 9612.5. As attached vol chart attached indicates, this sale is near the lower end of the vol range, but is near 20-day historical. I think this is a program sale, as it seems to happen every couple of quarters (large put sales on first red, just out of the money). For the sake of comparison (roll) SFRU5 9600p settled 32.5 against 9608.
–Event of the day was Powell. He indicated the Fed is in no hurry to cut rates. Still wants to recalibrate but says with the economy strong the Fed has the luxury to see how things develop. Said that fiscal policy takes a fairly long time to work its way through the system… but in my opinion, the change in incentives is unquantifiable, and can happen very quickly. DXY ended near 107, a new high for the year, after being as low as 100.38 (low of the year) on Sept 27. Hard whiplash in the dollar over past six weeks. Heavy corporate bond issuance adding marginal pressure on rates.
–Powell spoke right at futures settlement time. This morning back SOFR contract from Dec’26 out are down 1.5 to 0.5, but near contracts (and stocks) are still absorbing the idea that the Fed could be on hold. SFRZ4 settled 9558.5, but trades as low as 9553.5, -5 from settle of 58.5 . EFFR is 4.58 (Price 9542). SOFR is 4.60ish (9540 and daily compounding adds a bp or so). SFRZ4 not quite ready to give up on a “recalibrating” ease on Dec 18, but it’s getting harder to make that argument.
–BOJ’s Ueda speaks Monday. I attached 20y JGB chart from yesterday. Longer maturities in Japan pushing for new yield highs (10y JGB around 1.07, 20y 1.89 with high 1.95 in July, just prior to the yen-carry volatility).
This chart is SFRZ5 implied vol with 20 and 60 day historical
