Front end pricing favors Dec cut
December 5, 2024
*******************
–News articles attribute bitcoin’s surge above 100k to a pro-crypto choice for the SEC. Paul Atkins. I guess it has nothing to do with political gymnastics in S Korea and France. Or with Blinken urging Ukraine to conscript younger kids into the meat grinder. Well, maybe it doesn’t because gold is still 5.5% off the high made just prior to the election. (Even priced in won, gold not quite at a new high). Bitcoin is easier to transport.
–Powell’s comments yesterday were middle of the road, though he said the US economy is in a good place and said it was stronger than the Fed had thought in September. Near contracts maintained a solid bid, with odds for a December cut increasing. SFRZ4 settled 9560, +1. FFZ4 settled 9549.75, 70-75% odds of a 25bp ease. FFF5 settled 9561.5, FFG5 9567.5s. Current EFFR is 4.58% or a price of 9542. A cut of 25 would take EFFR to 4.33% or 9567.0, exactly where FFG5 is now. On an actual ease on Dec 18, how much higher should FFG5 go? Depends on Fed guidance, but I doubt it could get to 50/50 (9579.5). Neutral is higher than they thought. Several Fed officials have tamped down on forward easing projections.
–New recent low in SFRH5/M5 three-month spread at -20.5 (9586, +3.5/9606.5 +5.5). Recent low in the spread was -38 on Sept 11 (pre-FOMC). Post-FOMC the spread rallied as all rate contracts sold off; recent high of -14.5 on Nov 22. The market believes Waller that the path of rates is lower over time, but the terminal rate has shifted higher. Peak contract on SOFR strip is SFRU7 at 9640 or 3.6%. SFRM5 is 9606.5…so there’s only 34 bps over that two-year period.
–Today’s news includes Jobless Claims expected 215k and Trade Balance. NFP tomorrow expected 200 to 215k; effects from Boeing strike and hurricane displacements still being felt. CPI is Wednesday.
Dec SOFR midcurves expire one week from tomorrow. SFRZ5 settled 9627.0 and 0QZ4 9625^ 19.5 (b/e 9644.5 and 9605.5). November range in Z5 was 9646 to 9601.5.
