Scotty: I don’t know how much longer I can hold her together
October 6, 2023
–Yesterday Daly gave a speech which made the pause case:
If we continue to see a cooling labor market and inflation heading back to our target, we can hold interest rates steady and let the effects of policy continue to work. Importantly, even if we hold rates where they are today, policy will grow increasingly restrictive as inflation and inflation expectations fall. So, holding rates steady is an active policy action.
Likewise, if financial conditions, which have tightened considerably in the past 90 days, remain tight, the need for us to take further action is diminished.
–The market continues to price the possibility of tightening, but less so. For example, FFF4 is 9458 or 5.42% vs Fed Effective 5.33. Meetings are Nov 1 and Dec 13. FFX3/FFF4 which had been bought for 6 in good size on Sept 21 in a play targeting the Dec meeting for a hike, settled yesterday at 3.5 (9461.5/9458).
–Today we get payrolls, expected 170k. Rate expected 3.7% from 3.8% and Avg Hourly Earnings yoy 4.3%. Bloomberg headline says it might be the last of strong labor data. In any case, there was decent upside buying yesterday, notably 7k 0QV3 9550/9575cs for 5.5 followed by 20k 0QV3 9556.25/9581.25 cs for 5.0. SFRZ4 settled 9545.0, call spreads settled 6.0 and 4.5, expiry one week from today. PPI and CPI on Wednesday and Thursday. 3, 10, 30 yr auctions next week as well.
–In 2006/07 there were a lot of crappy mortgages rolled into securities that garnered AAA status from the ratings agencies. Mortgages are no longer at the heart of financial stress, this time it’s the Federal Gov’t with gargantuan borrowing and Corporates that need to roll debt in the next year. However, I saw an interesting tweet citing Kirian van Hest: “Every single bond inside the largest Mortgage-Backed Securities ETF has been downgraded and nobody is talking about it.” I believe the ETF is MBB. I didn’t have time to listen to it, but here’s the link:
https://twitter.com/JG_Nuke/status/1709742289059246487
