"With oil prices going down, I'll demand that interest rates drop immediately” Trump said in Davos on Thursday.
Wait, is that how interest rates work? You mean to tell me we’ve been doing it wrong all this time? I guess if Biden can buy student votes, Trump can buy broker votes.
If he’s taking requests, demand
I’m not sure Jerry could have handled that hiring process any worse, but it brings me such joy knowing they promoted the wrong coordinator. Hopefully Quinn doesn’t break my heart today. Meet the new boss, same as the old boss.
“We won’t get fooled again!” – Dallas fans. Jerry knows better than everyone else, right Cowboys fans?
Speaking of thinking you know more than everyone else…"I think I know interest rates much better than they do, and I think I know it certainly much better than the one who's primarily in charge of making that decision.”
Before I could say, “Does this guy really think he knows interest rates better than the Fed?” the Real Boss™ jumped in with, “he sounds like someone else I know…”
“Stop me if you’ve heard this one before…DJT, Jerry Jones, and The Real JP walk into a bar…”
Last Week This Morning
Fed Meeting Wednesday
Obviously, the Fed won’t change rates this week. With no updated economic projections (SEP), Powell’s press conference will be the market mover. He has been consistently more dovish than expected, but how will he retain optionality while keeping a lid on inflation expectations?
Think about how hard it will be to account for the potential impact of Trump policies. Look at oil. With Trump’s executive order to open up federal land and waterways, it should put downward pressure on oil prices. A $20/barrel drop in oil (which would put it back in line with Trump 1.0 averages) translates into about a 0.5% in headline inflation readings. If headline CPI drops from 2.9% to 2.4% from this single thing, how will the Fed react? Now extrapolate that across things like tariffs and immigration and a tough job just got tougher.
The meeting is Wednesday, but we get GDP on Thursday and Core PCE Friday. The Fed will have an advanced look at those data points, which means Powell’s tone likely reflects info that we don’t yet have. This could cause more volatility than usual as the market uses his comments to trade ahead of the public releases.
I am most interested in seeing how cranky he gets at repeated questioning about Trump demanding lower rates. What if we turn it into a drinking game? Every time Trump’s name gets mentioned, drink.
I think after a couple of those drinks, Powell would admit he expects a couple of cuts this year, but he can’t talk up cuts in the midst of this animal spirits momentum. I think he is just riding things out until Q1 is behind us.
Rates
It’s interesting to note how the different parts of the curve are focused on different things.
The front end is focused on hikes. Take that risk off the table, and cap prices can fall. Inject odds of a hike, and caps costs jump. Right now, the number of cuts is less critical.
The long end, however, is more focused on cuts. That ultimate landing spot is pushing and pulling the T10 around.
Some Unique Hedging We’re Seeing
Way more activity in the last two months for long term, high strike caps. For example, we traded a billion dollar 3 year 5.33% strike last week for 47bps. The basic rationale was “I think the risk of inflation re-accelerating is real and setting the strike at the recent top helps me sleep at night.” This particular borrower hadn’t modeled any cuts, either, so from his perspective he was just reinvesting that found money.
Swaptions – buying options on fixed rates in the future. A borrower worried about the T10 running up to 6% can buy protection against that. A borrower worried about rates plunging and increasing a prepay can buy protection against that. The increased volatility, coupled with the increased optimism for deals, has led to an increase in ways to hedge.
Lastly, WAY more swaps. I can’t remember the last time we were working on this many swaps. 10 years? Banks seem to be reacting to the outlook of fewer regulations and auditors stalking the hallways. These term sheets are looking pretty aggressive, even compared to agency stuff in some cases.
Oh, and Pensford helps with swaps. I feel like I have to say it because we frequently hear, “I’m just doing the swap with the lender, so I don’t need to auction it.” That’s how swaps work – the lender uses the collateral on the loan to support the swap. But when you are forced to work with someone, isn’t that when you need help negotiating the most? What’s the correct spread? What’s the live rate? What provisions to the ISDA are negotiable?
If I had a dime for every time I’ve heard, “Oh, you guys can help us with swaps?” I would have put that money towards NFC Championship tix.
The Week Ahead
First FOMC meeting of the year on Wednesday! But we also get GDP and Core PCE. And hopefully the Birds and the Bills win today.
In Saquon We Trust…