25BP Hike = Greater Risk Free Interest Creation
Last hike? No Recession? Dow 13th victory in a row?
So the FOMC results were as expected a nice cherry on top 25bp hike to move the Federal Funds target range to 5.25%-5.50%. This also means that $1.75T in RRP will now earn a juicy 5.30%, creating risk free interest of $92.75B and the IORB rate will move up to 5.40% and considering excess reserves sits at $3.2T that is an annual free interest rake of $172.8B. So with the RRP and IORB combined that is an inflation busting, risk free interest creation mechanism of $265.5 Billion.
This is highly supportive of the banking sector in regards to Net Interest Margin and as long as defaults and deposits don’t start adding up and fleeing in mass, well this is adding some juicy revenue to the sector. The Fed Funds rate is now above the 2007 pause threshold prior to the massive steep cutting regime of 2008:
This was the 11th consecutive hike and J Powell made it very clear that inflation risks are still their top priority and stressed that one month of data doesn’t take away that risk. We couldn’t help but feel that Powell was very afraid to signal any end to this current regime. His candor and verbiage was very cautious in conveying any signal that this was the last hike. He went with the usual Fed Speak stating data dependency and taking “not one single data point” but all the data in totality to generate the necessary policy response.
We just wish one of the journalists would ask the right question about IORB and why we still need it if the goal is to reduce inflation. Because adding $265.5B in risk free interest is just as big as the BTFP banks subsidy program and doesn’t really make sense in a rate hiking regime. Thus Magnelibra’s only conclusion is that it exists for that very subsidizing reason.
Furthermore the FOMC was unanimous on their call for an avoidance of a US Recession…hmm where have we heard that before, oh yea, from Bernanke right before the Great Financial Crisis:
So we do not take the FOMCs word for its pretty useless and we know credit is tightening, we know inflation is collapsing and we know interest payments are killing the US budget…so let’s just hope they don’t crash us like they did in 2008!
The markets overall response was mixed as the equities initially dipped, then rallied but fizzled into the close with the Nasdaq the weakest link again. Fixed income was well bid in the front end, not sure if it will last but if this is indeed the last hike we would suspect the front end to start outpacing and steepening into the next few months. The dollar was a bit weaker with Gold and Silver higher on the day.
When we look at today’s settlement page we have to say the US fixed income curve stands out today as the belly, 5s and 10s were notably stronger:
Here is how the US Yield Curves settled out for the day:
As far as our GFBP Positions Tracker it had its best day in quite some time:
One change we are looking at and close to flipping is the Crude/RBOB, our program doesn’t pick tops or bottoms but rather is proactive in trend failure capture and a consecutive negative move in this spread via a weaker RBOB would most likely trigger a reversal in our sentiment.
The MEGA8s were mixed today but Microsoft was the big loser on the day dropping $13.21 and shedding $98B off its market cap:
The option hedge really shined today and we will exit this position if we can get a close down near 0.25 or so and resell next weeks expiry but probably move up in strike.
As far as equities late in the day we saw META release earnings, per Zerohedge:
Revenue $32.00 billion, +11% y/y, beating estimates of $31.06 billion
Advertising rev. $31.50 billion, +12% y/y, beating estimates of $30.43 billion
Family of Apps revenue $31.72 billion, +12% y/y, beating estimates of $30.55 billion
Reality Labs revenue $276 million, -39% y/y, missing estimates $391.9 million
Other revenue $225 million, +3.2% y/y, beating estimate $224 million
EPS $2.98 vs. $2.46 y/y, beating est. 2.91
META is +6.84% in after hours trading per MarketWatch:
Alright let’s end it with a few charts here, first up the Nasdaq which saw late day selling prior to META release but we will continue to monitor that 15700/15800 area for resistance with massive overhead resistance at 15950:
The Dow is on its longest win streak since 1987 posting its 13th straight up day, but we see a double top in the making:
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