Tell him the good part
March 24, 2022
–In terms of the market’s perception of Fed tightening, perhaps there is nothing cleaner and clearer than a couple of FF calendar spreads. The attached image shows the six-month calendar July’22 to Jan’23 Fed Fund spread. It settled at 101, nearly 4 twenty-five bp hikes exactly, as it prices the four FOMC meetings on July 27, Sept 21, Nov 2 and Dec 14. The January’23/January’24 calendar spread prices the year of 2023. That spread settled 50.5 bps, or 2 twenty-five bp hikes….for the entire year. Obviously the market believes in the front-loading rhetoric of Bullard and Mester etc, but by next year, the market perceives serious slowing. The relevant prices are FFN2 9880.5, FFF3 9779.5 and FFF4 9729.0. Note the FFF4 contract is priced at a rate of 2.71%….WAY below current inflation readings. Does that make it an easy sale? Or does it tell you that the Fed’s hiking into an already slowing economy, which will REALLY put the brakes on?
“Some of our clients are speculating that the price of January 2024 Fend Funds will rise in the future, and we have other clients who are speculating that the price is going to fall.”
–New low in 5/30 spread which I marked at 18 bps at the CST 2:00pm futures settle, but it was printing 15.5 about an hour later. Some people, including Fed officials, are looking back to 1994 as a model for the current hiking cycle. I will simply note for now that in 1993 the FF target was 3% for over a year, from late 1992 thru ’93. By the end of that period there was a lot of pent-up demand. In the current environment, demand was artificially unleashed with stimulus checks and gov’t spending. The ten year yield started 1993 around 6.4% and ended the year around 5.85% so there was a lot of positive carry throughout the period. In 1994 total debt (z.1 report) was $13.7tr. Of that 33% was households, 29% businesses, and 28% the Federal Govt [doesn’t sum to 100% due to some other categories]. As of the end of 2021, total debt is $65 tr, HH balance sheets look good at 27%, businesses holding steady at 28% and the Fed Gov’t at 39%. Clearly the Federal govt has amassed debt to support the economy, and the Fed accommodated by buying that debt. Now the process is reversing, and a Republican Congress in November should somewhat stifle Fed Govt spending. It’s not 1994.