The Fed convinces the market eases aren’t coming (with a little help from bad data)
February 27, 2023
–Rate futures crumbled Friday on higher than expected PCE prices, +0.6 on the month and 5.4% on the year. YOY Core 4.7%. The 2y yield soared nearly 12 bps to 4.807% while tens rose 7 to 3.947%. 2/10 remains pinned to recent lows at -86. April FF contract settled 9512 as the market slowly prices increasing odds of a 50 bp hike at the March 22 FOMC (9517 would equate to a 25 bp hike). New highs in near calendar spreads, for example SFRH3/SFRH4 settled -8 (9500/9508), having been as low as -104 in the beginning of February. The Fed has quickly realized its goal of convincing the market that easing is unlikely to happen any time soon (though it wasn’t really the Fed, but rather unwelcome data that drove the move).
–Today’s news includes Durables and the Dallas Fed Mfg index. The Fed’s Jefferson gives a speech at 10:30; his first speech as a board member last October cited strong labor markets and high inflation. “…inflation remains elevated, and this is the problem that concerns me most.” I wouldn’t expect much of a change.
–Friday featured a large new buy of 100k 2QZ3 9775/9875cs from 7 to 8 bps, settled 7.75 vs 9553.0. Underlying contract is SFRZ5. Expiration date Dec 15, 2023. This week brings ISM Mfg and Services, but the employment report is one week from Friday on March 10.
