Stability at the Fed (but maybe not markets)
November 23, 2021
–New lows in all front euro$ contracts as Powell was reappointed, causing an unwind of bets for a more dovish Chair. Greens led the carnage, down 14 bps on the day (3rd year out). All contracts from EDZ2 back were down at least 10.5. New highs in some of the near calendars: EDM2/U2 rose 2.5 to 25.5, solidifying the perception of one hike over the period, even as financial commentators can’t quite decide whether the Fed will hike by the END of 2022. The peak one-year calendar is EDM2/EDM3 which settled 95.5, up 8 on the day and essentially forecasting 4 hikes over the year. Two and five year auctions saw tepid demand (even at higher yields) and on the treasury curve fives were weakest (up 11 bps), with 7s being auctioned today. Markit PMIs today as well.
–In spite of bearish trade, bonds could not break thru 2% and closed just above 1.98%, up 7.5 on the day. 5/30 treasury spread made a new low of 67 bps. Tomorrow brings the Fed’s preferred measure of inflation Core PCE prices, expected +4.1% from 3.6% last.
–In terms of Fed policy, the eurodollar curve, even with recent weakness, portrays a very easy Fed. Forward pack prices (4 contract average prices) are as follow: Reds (2nd yr) 9865 or 1.35%, Greens 9820.5 or 1.795%, Blues 9812.5 or 1.875% and Golds 9808 or 1.92%. Bear in mind that in 2018 as Powell was trying to ‘normalize’, the FF target rose to 2.25/2.50%. Out to five years the FF target isn’t even expected to rise above 1.75% in the current cycle. The outcome of financial repression is the suppression of risk/reward. Friend Tony Hamer notes in a Linked post, “The fact Tesla’s market cap increased by $200 billion with the announcement of a purported agreement to sell 100,000 Tesla cars to Hertz is stunning given the deal has a gross margin of about $375 million.”
–Vols took a nice jump on the sell-off. I marked TYH vol 5.0%, getting closer to the upper end of the recent range.
