“Recessionary false alarm” ???
April 10, 2023
–A BBG story this morning proclaims, “Bond Market is Overplaying the Risk of a Deep Recession”. Part of the article cites the relative calm in VIX vs MOVE. “Explaining the divide has become a Wall St obsession – an urgent one, given the sway treasuries hold in models designed to divine the future of inflation and Fed policy. One concern is whether things having nothing to do with the economy – bearish positioning among speculators, specifically – made the big drop in yields a recessionary false alarm.”
–After the Feb 1 FOMC and its focus on inflation, followed by the monster Feb 3 NFP, with a higher than expected CPI on Feb 14, it’s no surprise that positioning leaned heavily to the bearish side. While the March short-cover reaction to the failure of SVB was spectacular, many interest rate futures contracts have settled right back around the levels they were in late Jan. The primary signal remains the deeply inverted one-year calendar spreads in SOFR, which are forecasting ease based on an economy vulnerable to rapid deterioration. At least that’s MY primary signal. (SFRM3/M4 -152.5, SFRU3/U4 -152.5, SFRZ3/Z4 -133.0).
–Friday’s employment data however, with NFP +236k, did not reflect immediate fallout from the bank failures. SFRZ3 led the way lower, dropping 19.5 bps to 9571.0 or 4.29%. That level is still quite a bit lower than the current 4.83% Fed Effective. Curve inverted further Friday: Reds -17, greens -12.5, blues -9.375 and golds -8.0.
–Plenty of news this week. 3, 10 and 30yr auctions. CPI Wednesday expected 5.1% from 6.0%, followed by Fed minutes from the March 22 meeting. PPI Thursday, Retail Sales Friday.
