Fed recommends boarding up windows and doors in case another hurricane hits
August 31, 2023
–ADP added a buying catalyst for the short end on Wednesday following weaker than expected JOLTs on Tuesday.
ADP lower than expected at 177k vs 195k expected and Q2 GDP revision was also lower at 2.1%. GDP Price Index was 2.0% vs 2.2 last, exactly at the Fed target.
–Both 2s and 10s edged slightly lower in yield (less than 1 bp) ending as 4.882% and 4.118%.
–Today’s news includes PCE prices expected 3.3% yoy from 3.0 last, with Core 4.2% from 4.1% last. Jobless Claims expected 235k.
–Buyer yesterday of 30k SFRH4 9537.5/9625/9637.5 call tree for 0.25 credit to flat. Settled 16.5/8.75/8.0 so -0.25 vs SFRH4 9477.0. Given the explosive rally related to banking turmoil in March (see below), some might be uncomfortable with the open-ended leg. However, there had been huge buying of 9700/9800c spreads and 9675/9775c spreads, and IF this buyer is also long 100 point call spreads above, the open leg doesn’t seem particularly problematic. SFRH4 9700c settled 5.25.
Also a buyer of SFRZ3 9462.5/9468.75cs vs sell Z3 9443.75p for 5.0 credit, about 20k. Settles 12.0/9.75 vs 7.75. This trade works with no further hikes and a bias toward ease. It’s probably breakeven with just one more 25 bp hike.
–It appears as if the Fed is spending a lot of time on regulatory ‘solutions’ for potential banking problems [related to the inverted curve and declining credit quality].
–“The Federal Reserve has issued a batch of private warnings to lenders with assets of $100 billion to $250 billion.”
–Also, from the Fed website on Tuesday:
Federal bank regulatory agencies today requested comment on a proposal that would require large banks with total assets of $100 billion or more to maintain a layer of long-term debt, which would improve financial stability by increasing the resolvability and resiliency of such institutions.
