Marko Bjegovic Profile picture
Dec 21 14 tweets 9 min read
Ever since the #Fed meeting last week 2YR has been below the FFR.

2YR has long served as a proxy for the mkt perceived terminal FFR.

Hence the mkt doesn't trust the #Fed's estimates of 5%+ rates but thinks this is THE terminal rate.

What will the #Fed do?

A thread.

1/14
In the last 46 yrs there were quite a few instances with negative 2YR-FFR spread, 17 to be exact.

Interestingly enough, almost every time the spread went negative, the #Fed actually cut rates.

Let's take a closer look.

2/14
Not counting the current one there were 16 instances with negative 2YR-FFR spread.

Only once out of 16 times the #Fed hiked FFR and that was from Oct 1978.

However, at one point the #Fed started cutting and altogether FFR was unchanged in a period of 23M through Aug 1980.

3/14
In other words, there is a 93.75% chance the #Fed will cut rates when 2YR-FFR spread turns negative.

The magnitude of cuts can vary from insignificant 5 bps to a whopping almost 700 bps.

Average rate cut is -280 bps.

4/14
Most of the time the #Fed cut right away when the 2YR-FFR spread turned negative but there can be a delay of 2M-13M.

All 4 of the most recent instances since 1998 had delays and in July 2006 the FFR was unchanged for 13M before the #Fed started cutting in Jul 2007.

5/14
Let's now take a look at what happened in Oct 1978 when the #Fed didn't cut rates after the 2YR-FFR spread turned negative.

The #Fed hiked instead due to a surge in #CPI.

#CPI started +0.9% MoM, eased a bit to +0.4% and then kept surging until it reached +1.5% peak.

6/14
In other words, this episode from late 1978-early 1980 can be described as the only time when the mkt got the #inflation wrong thinking it would finally fall but it kept surging.

In all of the other 15 instances it was the #Fed who actually got the #inflation wrong.

7/14
Today situation is quite different than what it was back in the 1978.

#inflation is practically nonexistent.

Here is why:


8/14
3M moving average of unadjusted headline CPI is below the #Fed's #inflation target.

Here is more on that:


9/14
Core #CPI where Shelter component is swapped with Apartment List National Rent Index has been NEGATIVE MoM for the last 3 months.



10/14
If you haven't already, check out this whole thread for a comprehensive overview of the latest #CPI:


11/14
To recap, negative 2YR-FFR spread means the #Fed will cut rates.

The #Fed #pivot will happen.

Still 2 important Qs remain:

1) Will there be a delay and how long will it be?
2) By how much would the #Fed cut?

12/14
These threads take a lot of time and effort to write.

If you like the content, please love and retweet to help me spread the message.

13/14
I will answer these 2 important Qs about the #Fed #pivot and many more about the economy and mkts in my next

Pick Marko's Brain workshop.

Stay tuned.

14/14

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More from @MBjegovic

Dec 13
Nov #CPI was the 2nd better-than-expected report in a row.

The last time that happened was, prepare yourself, in Oct 2018!

It didn't even happen during the lockdowns in 2020 making this report all the more significant.

Let's delve deeper.

A thread.

1/15
On an unadjusted basis headline #CPI was down -0.1% MoM, the lowest MoM reading since April 2020!

Back then the economy was on forced lockdown and this is only second to that lowest 2 readings (Mar-Apr 2020) in the recent history.

2/15
3M moving average of headline #CPI (MoM unadjusted) is 0.17% which is 2.1% annualized, well BELOW the #Fed's #inflation target.

I already explained this but for the ones that are reading this for the first time, yes, you read that right - 2.1% #CPI is way below the target

3/15
Read 16 tweets
Dec 12
This week we get the 2 most important things that will end this year:
1) FOMC meeting on Wednesday
2) November #CPI report tomorrow that will likely determine what we'll hear by the #Fed on Wednesday

Can Nov #CPI make the #Fed go sub-50 this week?

A thread.

1/11
We had a better-than-expected #CPI in Oct which was only the 2nd beat on the headline, and 3rd beat on the core this yr.

Since beats on the #CPI have been so rare, many (among which @biancoresearch) have been using it as an argument against potential beat again in Nov.

2/11 Image
OTOH rare beats look more like an argument FOR rather than an argument against another beat.

Just based on this, now odds are stacked for the #CPI to come better-than-expected in the coming months.

But does that include Nov?

3/11
Read 11 tweets
Nov 27
I've been saying this the whole yr.

Earlier many disagreed saying the #Fed needs to go to 4, 5, 9%... to "kill" the #inflation but, just as I was saying, it turned out the #Fed can't do a thing to this #inflation as it's running its course no matter what the #Fed does.

🧵

1/22
In hindsight what could have the #Fed done differently?

Their first policy mistake was not starting hiking #FFR in Mar 2021.

Still, I don't think they could have done much to this #inflation.

Maybe the peak #CPI YoY would be 8%-ish instead of 9.1% but not much less.

2/22
This is bc of the nature of this #inflation which was mostly caused by factors out of the #Fed's control.

Here is more on that (bear in mind this estimate was done in the early stages of hikes - I think May- by now MP has long eclipsed the demand %)


3/22
Read 22 tweets
Nov 10
Oct #CPI came in way better than consensus estimates and even better than I projected.

This is only the 2nd beat on the headline and 3rd on the core #CPI this yr.

Does that mean the #CPI has really started to come down and the #Fed can #pivot?

🧵

1/18

In the details this was a good report. MoM unadjusted:
1) Food +0.7%, same as Sep
2) Energy +1.0% vs -2.6% in Sep due to higher gas prices (+3.1% vs -5.6% in Sep), while #electricity and #natgas went down (-1.3% and -4.0% respectively vs +0.8% and +2.6% respectively in Sep)

2/18
3) Apparel unexpectedly went down by -0.6% vs +2.2% in Sep
4) New vehicles edged up to +0.5% vs +0.4% in Sep
5) Used vehicles and trucks -2.3%, slower than in Sep (-4.2%)
6) Medical care commodities -0.02% vs -0.09% in Sep
7) Alcoholic beverages +0.8% vs +0.1% in Sep

3/18
Read 18 tweets
Nov 8
Amid the election today it is easy to forget we get the Oct #CPI Thursday.

#CPI is the most important economic report this week.

So where will the Oct figure print?

A thread.

1/8
In prior months my estimates were ahead of both consensus and the Cleveland #Fed.

They also turned out to be more optimistic than the actual numbers.

Non #CPI/#PCE indicators are showing a clear #disinflation, even MoM rent #deflation:



2/8
Rents make 32% of the #CPI (about 40% of the core #CPI) and are therefore the crucial component.

Even if we seasonally adjust them, rents are showing clear declines, the largest in at least 5 yrs:


3/8
Read 8 tweets
Nov 8
This came as a huge surprise to me... still not sure what's the real agenda behind this?
cnbc.com/2022/11/08/bin…
$BTC lowest in 2yrs
Read 7 tweets

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