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June 1, 2023
–It’s the strategy I thought was an appropriate pivot for the Fed, continue to talk tough but don’t actually hike. That way, the threat of future tightening stays alive which would limit near-term ease speculation. In any case, Mester said she sees no compelling reason to pause rate hikes, followed by Fed Governor Philip Jefferson: “… skipping a rate hike at a coming meeting would allow the Committee to see more data before making decisions about the extent of additional policy firming.”
–Banks are still weak. For example PACW was 20 in Feb now 6.45. KEY was 20 in Feb, now 9.34 (down 6% yesterday). USB 50 in Feb now sub 30 (-2.5% yest). Is the credit crunch upon us? Chicago PMI was 40.4 vs 47.3 expected. Dallas Fed Tuesday was -29.1, worst since depths of Covid.
–When Jefferson’s comment was released (and duly tweeted by WSJ Timiraos: “The Fed is firming up plans to slow down the pace of rate rises by skipping a June hike, barring a blowout jobs report on Friday), FFN3 was trading 9474. Within a few minutes it was up to 9481 and settled 9482. A six bp move can be roughly thought of as shaving 25% off odds of a hike (On no hike FFN3 should be 9492). So FFN3 settled +8 at 9482 but FFQ3 only settled +5.5 at 9471; a spread of 11. NFP Friday expected 190k from 253k last, Avg Hourly Earnings yoy expected 4.4, same as last. It’s worth noting that CPI is June 13, the day before the FOMC.
–Jefferson’s comment is a pretty clear signal to exit treasury curve curve trades, though short term bill issuance may keep the curve under pressure in the short term. 2/10 rose 2.6 bps to -75. On the SOFR curve, SFRZ3/Z4 made a new low -160, down 2.5 on the day, while SFRU3/U4 remains the most inverted at -165.5.
