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Curve Unwinds and Late 2024 Inversion

US EURODLR FUTURES
Persistent inversion in late 2024 Eurodollar futures (market pricing in expectations of rate CUTS as current round of hikes to counter inflation expectations seen as unsustainable) has spilled over to nearer expiries: Greens (EDZ3-EDU4) traded flat last week. Sporadic steepener unwinds have been noted.
  • Similarly, TD Securities has unwound Red Sep'23/Green Sep'24 steepener position after the spd contracted from 24bp to 10bp. Since putting on the steepener, "Fed Chair Powell communicated a likely acceleration of tapering at the December FOMC, which brought forward the market pricing of the timing of the first hike," TD said. "We are now pricing in the first hike in June 2022 and 80bp of hikes in the first year."
  • However, the market pricing of the terminal rate (which we define as the rate priced in 3y after hikes begin) has declined from 1.65% to just 1.30%. We think the Fed talked about accelerating tapering to manage inflation expectations, but the threshold to hike rates remains high.
  • TD Said they do not "expect the Fed to lower their long run dot at next week's meeting, but markets can keep pricing in the risk of a policy mistake or a very shallow hiking cycle, which can keep the slope of the Eurodollar curve flat."
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