The Fed is Monitoring
February 24, 2023
–Had a friend working on the floor at our desk, everyone called him Zeets. Though he was clerking on the CME floor, he was training to become a teacher, and had assignments of going to classrooms and schools as an observer. He told the story of a big fight that broke out at a highschool in the student hall. “What did you do, Zeets?” Deadpan reply, “I observed”.
–Today we observe the Fed’s preferred inflation measure. PCE prices yoy expected 4.9% from 5.0 last, with Core 4.3 from 4.4. Incidentally Japan’s Core CPI yoy was 4.2%; Ueda said BoJ will maintain easy policy as inflation is mostly due to rising raw import prices. Also related to the inflation conversation, a candidate for Fed Vice Chair, Janice Eberly, favored a 3% inflation target to speed recovery from the covid crisis. Fooling around with inflation targets doesn’t seem to be that great of an idea, as this old chart from my library indicates (shows the adoption of FAIT in August 2020, suspiciously related to a surge in agricultural product prices).
–Yesterday I clipped a small excerpt from the FOMC minutes:
“In their discussion of issues related to financial stability, several participants discussed vulnerabilities in the financial system associated with higher interest rates, including the elevated valuations for some categories of assets, particularly in the CRE sector;“
This morning it’s reported that Columbia Property Trust (controlled by PIMCO) has defaulted on ~ $1.7 billion of mortgage notes on seven buildings. Late Jan/early Feb Blackstone gated REIT funds that were seeing heavy withdrawals. Larger problems ahead as pre-covid leases expire in the new WFH environment? Don’t worry…the Fed’s ON IT. (Like Zeets).
–Yields generally fell yesterday, with tens down 4.2 bps to 3.877%. TYH3 settled 111-14 with the 111.5^ expiring today settling at 28/64. Weakness in front reds on the SOFR curve: Example, SFRM3 was UP 2.5 to 9466.5, but M4 was DOWN 1 at 9572 and M5 was UP 5 at 9657. New recent low in red/green SOFR pack spread at negative 71.875. There was a seller (exit) of 25k SFRU3 9450/9400ps at 12.0 covered 9466 (orig buy 2/17 paid 6.0 vs 9495.5 for 100k).
–In a world of geopolitical fragility, maybe it’s worth mention that there were explosions followed by anti-aircraft fire in the Iranian city of Karaj which has a centrifuge factory and was previously targeted by Israel. Didn’t really see this reported in mainstream press, but there was a time when there was a pre-weekend tilt towards flight-to-safety.
https://www.timesofisrael.com/blasts-anti-aircraft-fire-seen-in-iran-city-said-to-have-been-hit-by-israel-in-2021/
