Staircase up (trap door) elevator down
September 14, 2022
–CPI yoy expected 8.1% actual was 8.3%, Core was 6.3 vs 6.1 expected. Front end was annihilated. EDH3 down 29 bps. SFRH2 down 29.5…biggest move and the lowest contract on the strip at 9573.5 (prints even lower at 9569.5 this morning). On the FF strip the largest net change was FFJ3 -31 on the day at a price of 9567.5. That’s lowest price as well. April FF indicates EFFR of 432.5. Current EFFR is 233, so after next week’s 75 bp hike to 308 (target 3.0-3.25%), April FF is forecasting another 125 over the following four meetings. Peak FF rate in 2006 reached 5.25%.
–FFV2 settled 9684 or 316 bps, which is well through 75 (9692) and pushing for 100. Nomura raised its call to 100 for next week, and Summers also said the Fed should hike 100. January Fed Funds settled 9583.5, essentially 100 below October. FT has a headline indicating that QT is straining the bond market. Gundlach is counseling restraint and suggesting the purchase of long bonds as the Fed crushes the economy.
–The curve flattened hard. The five year yield soared 13.5 bps yesterday to 3.59%, while the thirty year was essentially unchanged at 3.51%. The high point is the 2yr just over 3.75% (up 18.5 on the day). Rosy forecasts about equities having bottomed were eviscerated with SPX -4.3% and Nasdaq -5.16%.
–Midcurve Sept straddles expire Friday. 0EU 9575^ settled 13.5 vs 9578.5 in EDU3. 2EU 9650^ settled 13.5 vs 9646.0 in EDU4 and 3EU 9662.5^ settled 14.0 vs 9667.0 in EDU5.
