Short end absorbs hawkish Bullard comments/ long end not so much
April 8, 2022
–Bullard: “I would like the committee to get to 3-3,25% in the second half of this year.” Getting to 3-3.25 would be consistent with a eurodollar contract price of around 9663.0. Indeed, EDM3 settled at 9664.5 (+6 on the day) or 3.355%, and that contract is still the lowest price/highest yield on the euro$ curve. The next five FOMC meetings are May 4, June 15, July 27, Sept 21 and Nov 2. Current FF target is 0.25 to 0.50. So 3.00 to 3.25 would require 275 bps of additional tightening. Let’s assume 50 bps at every meeting through November. FF target would be 2.75 to 3.0%. That would take EDU2 through the 9700 strike and indeed there was a buyer of 50k EDU2 9700/9675ps for 2.75 (settled 2.75 vs 9766.5). VERY bold projection.
–Yesterday featured a continued bounce in the curve with the 2yr down 3.6 bps and 30s up 5.5 to 2.462% and 2.685% respectively. Philip Grant of ADG notes that this spread of 22 bps occurred just two days after the yields had inverted. While the short end of the market easily absorbed Bullard’s hawkish comments, the long end is struggling with implications of balance sheet reduction. Indeed, steepening was dramatically pronounced on the euro$ curve, with reds settling up 6.25 bps, while golds closed DOWN 6.875. Just looking at EDM’23 to EDM’26 spread: on March 25 it was -51, April 1, -96.5 and yesterday -63.5. Even with hawkish Fed comments front-end straddles were sold and fell by 3 to 4 bps, but what is interesting to note is that US (bond) vol closed at 13.9, a new high while FV was lower (chart). I.e. curve uncertainty is clearly shifting to the long end.
–Monster consumer credit number yesterday (Feb) of $41 billion with revolving up $18 billion, an annualized rate of 20.7! An interesting addendum on the Fed’s website that we can loosely file under the ‘extend and pretend’ column: “…the release will no longer report the Commercial Bank Interest Rates for 48-month New Car Loans. Instead, the release will report the Commercial Bank Interest Rates for 72-month New Car Loans.”
Is this a good report because it reflects confidence? Or a very worrying report that indicates stretched consumer behavior? Or simply wrong data? The consumer confidence numbers have been declining…
–CPI on Tuesday expected 8.4%. Earnings season also upon us. Easter holiday is one week from Sunday and Friday markets are closed. Worth noting perhaps, is that Orthodox Easter is the following Sunday on the 24th which may or may not impact military activity in Ukraine.
