Who to believe, the Fed or the market?
July 17, 2023
–Rate futures gave back some of the gains from the early part of the week as Waller’s hawkish Thursday afternoon speech spilled over (2 more hikes and need to remain restrictive). On Friday 10s rose 5.7 bps to 3.816%. SFRZ4 was the weakest contract, settling -20.5 at 9616.5, which was still up 32 on the week.
–Buyer of over 20k SFRH4/M4 3-month calendars on Friday at -42.5. Settled -41.5 (9501/9542.5). Position appears new. Low in the spread was -50.5 in January, while the high post-SVB was -15. Currently the spread is priced for easing in Q2. However, if it appears the Fed is able to maintain high rates, then spread should edge more positive. Obviously an event like SVB can also briefly benefit the spread. Note that while Powell, Waller et al say another two hikes are in the cards this year, the FFF4/FFQ4 calendar spread in fed funds settled -91 (9465.5/9556.5). This spread captures the first five FOMC meetings in 2024 and is nearly priced for 1% of cuts. SFRZ3/H4 is -33.0 (9468/9501) so spread tends to roll more positive…as long as the Fed can hold.
–News this morning is about China…from the FT: China’s economy loses momentum in the second qtr. The bombing of the Crimea bridge has also sparked market moves, as Russia immediately halted the Black Sea grain deal. Corn, wheat and beans all bid this morning.
–Saw that Donald Sutherland was trending today as it’s his birthday. Here he is as Oddball in Kellys Heroes. “Don’t hit me with them negative waves so early in the morning. Think: that bridge will be there…”
