Hawk tuah
December 19, 2024
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–That was what the professionals might call, “a hawkish cut”. A couple of weeks ago I had thought the Fed might hold and BOJ hike. Wrong. Only Beth Hammack, Cleveland Fed President saw it my way, she dissented in favor of holding rates steady. Barely mattered as yields jumped, with weakest SOFR contracts down 15 on the day: SFRZ5 9595, H6 9598 and M6 9599.5 (all down 15). We’ll get back to SFRZ5 in a minute. BOJ held rates steady. Stocks were crushed with Nasdaq Comp -3.6% and SPX -3.0%. Hopes of an accommodative Fed were dashed.
–Changes in the quarterly Summary of Econ Projections (SEP) were startling. Estimates for the end of 2025 from September to yesterday:
Unemployment 4.4% to 4.3% (well that’s going to be wrong)
PCE inflation 2.1% to 2.5%
PCE Core 2.2% to 2.5%
FF projection 3.4% to 3.9% and then 3.9% back down to 3.4% for end-of-2026
–So in September the Fed had penciled in a cut of 100 bps over the coming year, and now it was shaved to just 50. The goal of 2% inflation was pushed back into 2026. Now using SFRH5 as the front contract, the lowest 1-yr calendar is H’25/H’26 which settled -20 (9578, down 5 and 9598, down 15). SFRZ5 at 9595 is a rate of 4.05% fairly close to the new Fed projection of 3.9%. Current Fed Effective EFFR should be 4.33%. It appears from 2025 estimates that the Fed’s notion of neutral is around 1.4% which is perhaps low.
–USH5 contract at a new low this morning 114-18. 30yr yield around 4.71%. $/yen has exploded higher, now 156.86.
