Keep at it? Or pivot due to crumbling economy?
September 20, 2022
–Yields continue to press higher with the 2yr leading the way +9.2 bps to 3.946%. Tens rose 4.2 in yield to 3.489%.
–WSJ article by Nick Timiraos leaked the Fed’s displeasure over rising asset prices following last meeting. Inflation is still job number 1. The last dot plot was in June (which now feels like ancient history). In March, the FF projection for end of 2023 was 2.8% and for end of 2024 was also 2.8% (We’ll be through that rate tomorrow). In June, the end of 2023 projection was 3.8%, and end of 2024 was 3.4%. In other words, front-loading was expected to give way to eventual easing. Clearly the ED and SOFR curves represent the same idea, but magnified. EDZ3/EDZ4 settled -66.5, over 1/4% more inverted than indicated by the Fed’s 2023 to 2024 projections. The MOST inverted one-year calendar is EDM23/EDM24 at -77.5. One of the core messages of Powell’s brief Jackson Hole speech was to “keep at it until the job’s done”. Even SFRZ2/SFRZ3 is -26.5. Will it be safe to say that the job’s done by the early part of next year? I don’t know if the dot plot will push back against the market pricing of forward eases, but I think Powell is likely to do so in the press conference.
–The lowest that any forward one-year calendar has been this year was -84, it was the 2nd to 6th, in late July. The 3rd to 7th reached -82.5. Current lowest is June’23/June’24 at -77.5. New recent low made in Sept’23/Sept’24 at -75.0 yesterday. To see LOWER one-year spreads, one has to look back to 2007 when 2nd/6.th reached -95.
–The spreads are clearly indicating that the ‘front-load’ policy will succeed in crushing the economy, leading to a pivot sometime next year. The last Fed Fund projections reflected the same idea, though maybe with the idea of a ‘soft landing’. There is likely to be a mixed message regarding the dot plot and Powell’s comments, which could probably be smoothed by the idea of smaller forward rate increases that are likely to be longer in duration, with focus on balance sheet reduction.
