Front end trashed
July 14, 2022
–Huge plunge in near contracts as the market assesses odds for a 100 bp move at the July FOMC in the wake of 9.1% CPI. FFQ2 ended 9750, down 17.5, and this morning prints 9748.5; on a hike of 100 the contract should reflect a new Fed effective rate of 258 bps or 9742.0. A 75 bp hike would be 9767.0.
–EDU2/Z2 settled 36.5, a new low, down 6.5 on the day with U2 -30 and Z2 -23.5, while EDU2/U3 settled -31, also a new low. Therefore, EDZ2/EDU3 settled -67.5. EDZ2 remains the lowest contract, 9602 at yesterday’s settle. I.e. we’ll reach the terminal rate at end of year…but what exactly is neutral with inflation 9%? Bostic late yesterday said ‘everything’s on the table’ though this is the guy that favored a 25 bp hike in March, and in late May said the he planned to proceed “with intention and without recklessness” and suggested a September pause might be warranted.
–2/10 now -23 bps. The early April low was -8. Low in Nov 2006 was -19. Low on 4/10/2000 was -56. JPM and MS report earnings today, and an inverted curve is a large headwind for the banks. Dollar/yen this morning prints 138.80, which is another headwind!
–The fulcrum on the curve as related to yesterday’s action was ED March 24 to June 24…EDH4 was -0.5 on the day to 9700 and EDM4 was +1.5 on the day to 9712.0. Everything from EDM’24 back was up on the day, with the ten yr yield dropping 5 bps to 2.906%.
