Waller reverses front-end weakness
December 3, 2024
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–Early trades featured pressure on nearer contracts. For example, early buyer:
FV wk1 106.75p cov 107-12, 18d 5 paid 50k (Settled 3.5 vs 107-167, OI +53k).
FV wk 2 106.75p cov 107-12, 25d, 9.75 avg paid 35k (settled 7.5, OI +35k).
(likely large asset mgr protecting against possible BIG rebound in NFP Friday)
SFRZ4 9562.5c about 30k sold on the day at 2.0, settled 1.75, open int rose 32k.
SFRZ4 outright 30k sold at 9556, settled 55.5. Front end rather weak, with FFG5 down 3 to 9562.0.
–Pressure on front end led to curve flattening. 2y yield up 3 bps to 4.20% while tens were essentially unch’d at 4.194%; 2/10 slightly inverted again. 5/30 at bottom of recent range, +26.6. SFRH5/H6 edged to new low at -49.5 (9576, -3.5/9625.5 -3.0).
–However, Waller’s speech post-settle included these lines:
I expect rate cuts to continue over the next year until we approach a more neutral setting of the policy rate.
…at present I lean toward supporting a cut to the policy rate at our December meeting.
–SFRZ4 immediately popped to 59.5. FFG5 this morning has erased yesterday’s deficit and is printing 9565.0. No mention by Waller of equity prices and their impact on financial conditions (new all-time-high AAPL yesterday). My sense is that the Fed will hold pat in deference to BOJ (likely to hike) because the Fed would rather not re-live August 5 volatility associated with yen-carry trades. $/yen currently 150. A Fed ease and BOJ hike might risk 145… Yesterday SFRZ4 9556.25/9550ps settled 2.75, 30 minutes post-settle it was 2.0 offer.
–Kugler speaks today at 12:35 on labor markets and econ outlook. JOLTS this morning expected 7519k from 7443. Steady trend lower since the peak of 12182 in March 2022. It’s now around pre-covid 2019 level.
–A few more comments from Waller below:
It is also a reminder that there is still some distance to go in reducing the policy rate to neutral.
Now let me turn to the implications for monetary policy based on my assessment of the underlying economic outlook. While some near-term aspects of the outlook may be a little unclear, something that is clear is the direction for monetary policy and our policy rate over the medium term, which is down. This downward trajectory reflects the fact that the level of aggregate demand in the economy, relative to supply, has moderated significantly over the past year—it is plainly visible in the data on spending and the labor market.
https://www.federalreserve.gov/newsevents/speech/waller20241202a.htm
