Signs the Fed’s strategy is ‘working’
September 19, 2022
–With December now the front contract in ED and SOFR, there is not a single positive one-year euro$ or sofr calendar spread until Sept’25/Sept’26, both settling +2. EDZ2/EDZ2 on Friday settled -37 (9547/9584) and SFRZ2/SFRZ3 at -31.5 (9578.5/9610). The most negative ED calendar is EDM3/EDM4 at -76.5 (9548.5/9625).
–I read a clip where a ‘strategist’ assured us that when the Fed stops hiking, stocks are going to take off. Um, every calendar being negative means that the market is forecasting easier Fed policy in the relatively near future. In fact, SFRH3/SFRM3 is -8.5 (9565.5/9574). So does that mean we should buy stocks NOW? Or mark our calendars for the start of Q2?
–CNY is above 7.0 this morning; the yuan has been consistently weakening since mid-April when it was 6.4. In front of Wednesday’s expected 75 bp hike from the Fed, USD continues to show strength, normally a sign of disinflation, but also representing an increasing degree of stress for non-domestic USD borrowers.
–Ten year note vs inflation-indexed ten-yr posted a new recent low of 239 bps, but in July the spread had bottomed at 230 (low for the year). Not sure if this is a valid proxy for long-term inflation expectations at this point, but certainly there are many signals that the Fed’s campaign is having its intended effect. Now we just have to see widespread job losses!
