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SPR drained again; crisis = opportunity

The User's Profile davefairtex April 16, 2023
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This week, there were five Economic Reports, plus the Fed balance sheet:

  • Industrial Production (INDPRO): +0.38% m/m [0.3% expected], manufacturing -0.53% m/m [-0.1% expected]. Mixed.
  • Retail Sales (RSAFS): -0.99% m/m [-0.4% expected]; recessionary.
  • Producer Prices (PPIACO); -0.65% m/m, deflationary.  Mostly due to energy.
  • Consumer Price Index (CPIAUCSL): +0.1% m/m [+0.3% expected]; non-inflationary.
  • Consumer Sentiment (UMCSENT): 63.5 [62 expected]; recessionary.
  • Fed Balance Sheet (WALCL): -17B w/w [-0.2%]; non-inflationary.

Retail Sales had troubles last month; that’s a bad sign, as is the low consumer sentiment, which has been in the dumps since 2020.  Consumer Sentiment levels below 70-80 are recessionary, although sentiment is slowly recovering off a worse-than-2008 low set back in mid-2022.  Both PPI and CPI numbers suggest falling inflation, but both of these are dominated by energy prices (energy = civilization), which plunged right up until OPEC pulled the plug on oil pumping last week – which isn’t included in these CPI & PPI numbers.  Services inflation remains high – of course it does – in sectors such as airline fares, hotels, motor vehicle insurance, food services, and cable.  It may be tough to get pilots and crew for all those flights.  Why?  Possibly due to missed cancer screenings, or maybe Sudden Adult Death Syndrome, or…maybe it is something else.

The big moves in the market came following the CPI release on Friday at 08:30 Eastern.   Note that this didn’t lead to expectations for a “no rate cut” outcome at the “CME Fedwatch Tool (Source) which is currently predicting a 78% chance of a 25 bp rate increase at the May 3rd Fed Meeting.

The rates chart below shows money continuing to flow into the 1-month Treasury.  With Fed Funds at 4.83%, and the 1-month at 4.26% (and with a 30 bp drop this week), that’s a pretty big gap, and we don’t see that in (say) the 3-month yield of 5.10%.  When the 1-month drops by -30 bp, and the 3-month rises by +15 bp, that’s a pretty big divergence.  So why is the 1-month so popular?  Again my guess – it’s the closest thing to a “demand deposit” that pays decent interest, so that’s where bank deposits are fleeing to.

Here’s a chart that makes the mechanics and the timing of this a bit clearer. 

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