Victor Masotti, director of Repo Trading at Clear Street, provided market commentary on repo market reactions after the Jackson Hole Economic Symposium, which brings together dozens of central bankers, policy makers, academics and economists.
“[Federal Reserve chair Jerome] Powell’s Jackson Hole remarks were the highlight of last week and this week thus far. Since Friday, we’ve seen the 1-month-3-month repo curve steepen as Powell’s hawkish comments have raised probabilities for a potential hike at the September and November FOMC meetings,” Masotti said.
Right now, futures markets are pricing in a 15% chance of a hike in September and a 50% chance of a hike for November if September were to be a pause. The first full cut is priced in for June 2024.
“Funding markets feel as if we finally hit an inflection point this week after we’ve seen $1 [trillion]+ in T-bill issuance since the debt-ceiling was suspended in early June. It’s been surprising how well the market has digested the increased bill supply without too much cash fleeing the Fed’s RRP facility and o/n repo funding costs staying range bound.
“This month-end is pricing a small premium to balance sheet, which is typical for month-ends, but it seems like that increased cost is being priced in to stay. September term markets are trading 2-3bps higher than average o/n rates throughout the month of August. We will continue monitoring Fed RRP balances and T-bill auction results as an indicator for repo markets.”