The reason why I bring up the neutral rate is because I think the market is actively debating it without realizing it or explicitly saying so.
Much of the consternation around Fed pricing right now is how many cuts is appropriate this year, but that implies that cuts themselves are appropriate. One of the key tenets for this view is that with inflation moderating and (to a lesser extent) activity cooling, the NOMINAL Fed Funds rate, if left unchanged gets more restrictive as inflation falls due to the real-FF increasing (Nominal-FF minus Inflation = Real-FF). Thus, in order to cool the economy without overtightening the Fed has to cut rates.

Economic Syncopation Update: Ummmmmm

Either we have a recession really soon or I think the Fed needs to hike?
Allow me to explain. The previous thread on Economic Syncopation and trusting the data is here for your savage reviewing and scathing criticism.

https://twitter.com/EffMktHype/status/1732241858498298095

Economic Syncopation: Trusting the Data

The key takeaway from my last update on Econopation™ was that if we looked at the rate of change and not levels, we could understand how various eco indicators are evolving and whether sentiment and reality are back in sync...or not. If not already clear, by turning to RoC we want to observe the indicators' direction relative to one another but also whether they are growing or declining (i.e. +/- 0%)
Smoothing out series' like ISM allows us to see the general trend: PMIs are flattening out (heading to 0%)

The reaction in bonds to CPI y'day was everything and nothing at the same time. If you told me inflation was going to come in soft and bonds would rally on the end of hiking cycle, I'd probably think the curve bull steepened.
Yet while everything rallied, the curve did nothing
To be fair, the other curves steepened more, with the belly outperforming the most. But again, it raises the question of why we rallied so hard.

An Update to Economic Syncopation.

I previously conceived this idea of non-synchronization in the economy back in Jan (that long ago??) and how the pandemic disrupted the natural cadence of leading and hard economic data.
I'm happy to report I'm not the first. It was not novel.
For those that missed it, here is the original thread. The basis of the discussion was how the pandemic and subsequent rescue compressed typical reaction times, thus causing everything and everyone to be out of lockstep - syncopation in the economy

https://x.com/EffMktHype/status/1619985221524520965?s=20

Rate vol continues to climb, with long end vol continuing to drive the show. Pain continues to be wreaked in the longer tenors as evidenced by the bear steepening in the curve that has not abated.

So...is it time to start nibbling on duration? Much of the pressure is in 10s but 30s bears (pun intended) watching. The 2022 rate hike campaign that ratcheted front end vol higher from monpolvol has ended. Recall that long end bonds were not spared - but they were passengers.
That the vol complex flipped raises the

This is the ratio of 1 month ATM implied vol on ES vs TY. It recently went as low as 1.61, only seen for a blip in 2014. Other notable observed lows close to this level was 2013 and 2016 (the first clue).
Now if you're expecting bearporn - let me finish first before you do
/ The point of a ratio is that is involves TWO moving parts. Now with that in mind, let's try to deconstruct this ratio and find some sense in it. The obvious questions are

"why is it so low, what does it mean and what does it imply?"

So let's start with the first qn.

"2s' peak always exceeds the peak in FF". Is the pain trade for rates clearly to the upside? Doesn't mean it will happen but it does mean it's possible and the market is still clearly reticent to acknowledge it (which continues to contribute to the divergences cross-asset wise.
/ The idea that 2s always exceed FF in a hiking cycle is something I am guilty of proposing, even back in August when 2s were sub-3.50%

https://twitter.com/EffMktHype/status/1563221345093054464?s=20

/

If ES/SPX closes relatively unchanged on 5/18 you can expect realized 10d vol to drop to ~8% annualized. What's that mean?
Fuck all. As in literally fuck all is going on.
Here let me show you how little fuckery is going on.

F/1 First we set up some variables to help measure fucks. Default it to 2% close to close change for a threshold in fucker and 20 intervals for the fuckery lookback.

F/2

How have things changed over the first quarter of the year? In a way...not much. But the nuance is in both levels and direction.
Sometimes walking in a circle helps you spot what's at the edge of the forest, sometimes running on a treadmill gets nowhere but you're fitter. Case in point: The US 2s10s curve is.......the exact same spot it was Jan 1. You're back at the same spot in the forest.
But what the trees tell you is that there was a persistent pressure for the curve to flatten only for that to be rudely blown up.

March 2023 Gif Recap

Macro traders Regional banks

The BBB Series – Topic 7: Part 2 – Exploring Other Swap Types

Here we will take a brief look at a few other swap types that have been mentioned in this series so far, as well as some swap types you might read about in news/fintwit. Again, we will not go too deep into each of them but more so focus on building the right intuition behind each of them – reasoning trumps rote.

I think that after yday's drama it is worth considering the amount of structural damage that has been done and the likely fact that severe market gyrations aren't over despite stocks higher in Asia this morning.
I'll mainly focus on rates/credit to illustrate. Rate volatility moved insane amounts. TYVIX shifted 4.39 points, the largest single move in a day. FYI, TYVIX is calculated the same way as VIX, but using the US 10 year future (TYA on BBG, /ZN on CME ticker)