Really?
June 15, 2023
–Big surprise out of Fed day was the increase in the dot plot regarding the FF target. The end-of-2023 dot went from 5.1% (projected in Dec and March) to 5.6%, and end of 2024 dot went from 4.3% in March to 4.6%. That effectively conveyed the message that NO EASING is coming this year, and I would bet that Powell lobbied every member to raise their dot forecasts 25 to 50 bps. Change in GDP for 2023 was marked up from 0.4 to 1.0, while unemployment was marked down from 4.5% to 4.1%. PCE inflation down 0.1 from March to 3.2 from 3.3 but Core revised up to 3.6 from 3.3. I guess we’re expecting an acceleration in economic activity? Doesn’t quite hang together. Is the economy that much more resilient (given monpol lags that JP cited)? Sort of reminds me of the Chappelle skit on Jussie Smollett: “…so you went out at 2 a.m. walking in -16 degree weather in Chicago to go to…Subway?” Again, the goal is to convince everyone that no ease is coming this year (even though the dots indicate 100 bps of ease next year). Powell deemed July a “live” meeting and said the risk to inflation is still to the upside.
–PPI yesterday was just +1.1% vs expected 1.5%. Core ex-food and energy was 2.8% vs exp 2.9%. Today we get Retail Sales expected -0.1%. Jobless Claims projected to revert back down to 240k from 261k last. Philly Fed -14 from -10.8 last. ECB this morning. Also, data from China was weaker than expected, but the most interesting note I saw was that “…the jobless rate for 16-to-24 year olds hits 20.8% in May, another all-time high that is four times the national rate which stands at 5.2%”. (ZH). What to do with a bunch of disenfranchised kids that could become a social problem? Send them to war.
–In terms of market action, near contracts were sold with SFRH4 weakest, settling -6.5 at 9512.5. Given selling in the short end after the much weaker CPI Tuesday. it seems clear that the dot plot projections had leaked prior to yesterday’s FOMC. The curve continued to invert to new recent lows. Attached is chart of 2/10 which was near -93 late, at the same level of late Feb just prior to a spike lower, followed by a surge related to the SVB failure. At futures close 2y +1.1 bp to 4.707% and 10y -3.7 bps to 3.802%. 2/10 is projecting a bad economic forecast, despite the Fed’s rosy scenarios. On Tuesday there was a seller of 100k SFRZ3 9650/9750cs at 4.5; yesterday the lower strike was bought back, paying 6.5 to 7.5; settled 6.5 ref SFRZ3 settle of 9480.5. FFF4 settled around the same level at 9480 or 5.20%. While BBG blares a headline that Powell “indicates at least two more rate hikes…” FFF4 is calling it 50/50 for just ONE more 25 bp hike.
