Short-Term Market Outlook And Strategy Ghosts of month-ends ...-111100728

1Teresa Ho AC (1-212) 834-5087teresa.c.ho@jpmorgan.comJ.P. Morgan Securities LLCPankaj Vohra (1-212) 834 5292pankaj.x.vohra@jpmchase.comJ.P. Morgan Securities LLCNorth America Fixed Income Strategy25 October 2024J P M O R G A N•MMFs have followed a familiar pattern of seasonal inflows this month, with total AUMs increasing by $64bn to ~$6.7tn•October month-end is set to capture the attention of market participants with indications for GC repo rates over the month-end turn already pointing to a rate above the upper bound of the fed funds corridor•ON RRP balances dropped to $203bn on 10/24, the lowest since May 2021, as GSE cash exited the repo markets and MMFs extended duration this month. However, balances should trend higher again as we approach month-end•The New York Fed announced modifications to the SOFR methodology starting November 25, 2024. The modifications will exclude transactions between affiliated institutions and will consistently remove 20% of the lowest-rate transaction volume in the centrally-cleared DVP segment •A comparison of SOFR based on the revised methodology versus the current methodol-ogy over the past five years generally shows no change to the rate. SOFR was unchanged 88% of the time, 1bp lower 9% of the time, and 1bp higher 3% of the time. Overall, the modifications are not expected to skew the benchmark rate materially in any direction and should smooth out the day-to-day volatility•Aligning with other Fed officials, Dallas Fed President Lorie Logan believes that reserves are ample, citing market indicators of abundant liquidity. She attributes money market pressures to intermediation frictions rather than reserve shortages, emphasizing the need to tolerate modest pressures for efficient balance sheet management•While the Fed is intending to bring RRP balances down to negligible levels, it is uncer-tain if this is feasible due to structural liquidity needs of some prime MMFs, despite potential ON RRP rate cuts •We believe SOFR better gauges overall market liquidity than fed funds, as SOFR reflects the liquidity needs of a wider range of market participants•Near-term catalysts: Aug JOLTS (10/29), Sep ADP Employment (10/30), 3Q Real GDP (10/30), 3Q Employment Cost Index (10/31), Sep Personal Income (10/31), Oct Employment (11/1), Fed Meeting (11/6-11/7)Market commentaryIn a week devoid of any material domestic catalysts, Treasury yields continued their move higher. In the front end, 2-year yields ended the week at 4.10%, increasing by 15bp week over week and more notably 49bp since the September FOMC meeting when the Fed cut rates by 50bp. To be sure, recent economic developments have once again shifted the narra-tive towards a soft landing, and in turn are helping to entrench market expectations of a decidedly shallower path of Fed easing. On the margin, this week's data continued to support that narrative. The October Beige Book, which provides a summary of current economic conditions across the 12 Federal re