Powell in the House
June 21, 2023
–Powell today in semi-annual testimony before the House. The objective continues to be convincing the market that an ease is not in near term prospects. However, yields eased yesterday with tens down 5 bps (from Friday) at 3.723%. FFQ3 settled 9473.5 or 5.265% while FFF4 settled -2 at 5.22% vs the current EFFR of 5.08%, so Fed restraint is being priced through year-end. However, FFF5 settled 9622 or 3.78%, up 3.5. More hawkish Fed talk may have a negative impact on stocks, but SOFR pricing tends to reflect a “more tightening now means more easing later” mindset.
–The Monetary Policy Report was released Friday
https://www.federalreserve.gov/monetarypolicy/publications/mpr_default.htm
–Links to testimony in advance of Jefferson and Cook nomination hearings were posted yesterday. From Jefferson: “Inflation has started to abate, and I remain focused on returning it to our 2% target. Despite recent stress, the US banking system is sound and resilient, and I remain attuned to any threats to its stability.” From Cook: “…elevated inflation is a grave threat to sustaining the expansion of the American economy. Therefore, in my role as a voting member on the Federal Open Market Committee (FOMC), I have been consistently supportive of our rapid and forceful actions to tighten monetary policy and bring inflation down. If confirmed, I will stay focused on inflation until our job is done”.
–Call buying continues, though yesterday a purchase of SFRU3 9550c for 5.5 (settled 5.0 ref 9467) was a short cover. I have added a chart of SFRZ3 9650 c which were heavily bought last week. Open interest went from 314k on June 12 to 435k coming into yesterday. That’s the most OI of any call or put in SOFR, settled 7.75 ref 9480.5. However, SFRZ3 9500p , which are 19.5 in-the-money with -0.59 delta, have 409k open, settled 44.75. In terms of risk reversals, SFRZ3 9425p, 55.5 out-of-the-money settled 7.75 with -0.20d, while the 9537.5c, 57 out, settled over 2x higher at 18.0 with +0.29d.
