Florida man

April 25, 2019

–There’s an amusing viral internet search game: Florida Man on your birthday.  It really doesn’t matter what the day is, a headline is almost certain to pop up with Florida Man engaging in some crazy, drug-(and/or booze)-inspired antics.  As Esquire notes, Florida Man is now a brand.  “He is the frayed fabric of a worn tobacco ring in his left back pocket.”  Sounds like a Peterman catalog ad.


My boring adaptation is to google the name of a country, followed by “cuts economic growth forecast”.  A lot of those headlines are from earlier this month.  April 3, “Germany’s leading economic institutes have revised down their growth forecast….”  April 9, Italy cut its growth forecasts & IMF cuts global growth forecast.  March 19, Paris revised down…  Etc.  Yesterday, it was Canada: (Rtrs) ‘Bank of Canada cuts growth forecast, abandons talk of rate hikes.’  And today, it’s South Korea, Asia’s 4th largest economy, which actually DELIVERED with Q1 growth negative 0.3% vs expected +0.3%.  The Korean won broke out of its stable range since July, and fell to a new low vs USD.  Low exports were the culprit. BOJ also out today, with a headline from FT noting the bank ‘vows to hold rates at zero until spring 2020.’  BOJ is also creating a facility to lend etfs, apparently to increase liquidity, since they now own EVERYTHING.  With quantitative purchases of every asset under the rising sun, Japan has smothered returns and liquidity and trading activity and risk perceptions.  

–Euro made a new low yesterday, and today there’s the encouraging news that talks between Deutsche and Commerzbank have failed.  The bund yield is sub-zero and only about 17 bps away from the bottom in mid-2016 of -18.7.  It was about six months later that the euro fell below 1.04 (vs 1.1132 currently).  It’s hardly surprising that there’s global demand for USD (and new highs in DXY).

–In the US, yields fell,  with tens down 5 bps to 2.52%.   On the euro$ curve, reds thru golds were +5 to +5.5.  Insatiable buying of call spreads, with notable new buys of EDZ20 long dated call spreads vs 9737p.  Yesterday it was 20k each 9775/9812cs vs 9737p paying 1.5 and 9800/9850 cs bought for flat premium vs 9737p.  January 2020 Fed Funds settled +4.5 at 9780.5 which puts odds of a cut by year end over 80%.  

–One last item (apologies for long note today). concerns the Almost Daily Grants missive which highlights AT&T, the most indebted non-financial public company.  The stock fell 4% yesterday on earnings, but the Grants piece says T is now focused on paring back its debt load in order to avoid a ratings downgrade.  The broader picture is that share-buybacks have been one of the main drivers of the stock market in general, directly or indirectly financed with debt.  If the theme of deleveraging were to take hold across a corporate sector now bloated with debt, the implication is that demand for stocks might wane.  Possible tipping point?   On the other hand, MSFT just surged over $1T in market cap….

Posted on April 25, 2019 at 5:27 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

USD Demand

April 24, 2019

–It’s pretty clear that there’s demand for dollars and USD assets as DXY rallied to a new high for the year, as did stocks (on earnings reports) while yields fell.  Almost all trades going through eurodollars are for possible Fed eases, with all contracts from EDH20 through the golds (5th year) up 2 to 3 bps.  At the same time, the Fed effective rate is printing 2.44, reportedly due in part to money market fund outflows related to the recent tax date.  In any case, there seems to be demand for short term USD funding, but a stronger dollar is contributing to disinflationary impulses at the same time.   For example, gold was down another $4 to a new low yesterday.  I have attached a chart with DXY and the BBG base metals and grains indexes; DXY at the high of the year with grains making new lows and metals treading water.

–As mentioned, nearly all ED option plays are for eases from Q3 forward.  Heavy buys in EDZ9 and EDH0 9775/9787 c spds as a package.  A new 40k position featured a buyer of EDZ20 9775/9812cs vs sold 9737p for 0.5 credit.  This settled at 0.75 credit vs 9774.5.  Position has +0.30 delta so equivalent to about +12k futures.  There was also a large ratio call spread in EDZ9, 9775/9800c 1×2, where the top strike was bought for flat (settled 6.25 and 3.25).  The 9800c settled unchanged at 3.25 with EDZ9 +1.5 at 9749.5, but it’s again worth noting that the equidistant 9700p settled at just 0.5.  Heavy buying in July and Sept calls are targeting the 9762.5 strike or higher.  Example +10k x 15k EDN 9762/9787c 2×3 for 4.0.  With 3-month libor just under 2.59%, the 9762.5 (2.375%) strike requires near certain probability of an ease.

–It’s rather surprising that yields are falling as equities surge to new highs, but markets have lost any lingering concerns about possible hawkishness out of the Fed. (Yes, stocks ARE the economy).  It’s also surprising that volatility in the oil market is falling even as prices print new ytd highs (though oil is a bit lower this morning).  — In treasuries 2/10 notched a new high at 20.7 bps, up 0.4.  There was a new buyer yesterday of TYK 123.25 calls for 7 to 10, (settled 8 v 123-04, OI +11k).  May treasury options expire Friday, and as of this writing that strike is 7 in the money with TYM printing 123-115.  Also worth noting with respect to the demand for dollars is that the Turkish lira is printing new ytd lows at 5.87.  While european banks have rallied with the rest of the market, the possibility of spillover effects if Turkey crumbles may become an issue.

–5 year note auction today. 

Posted on April 24, 2019 at 4:58 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

Is HOUSING inflation dead?

April 23, 2019

–The latest Bloomberg/Businessweek magazine cover asks ‘Is Inflation Dead?’  Not according to the oil market, which is at new highs today with CLM9 above $66/bbl (+0.53) as Trump ended waivers on sanctions for those who buy Iranian crude.  Iran threatened closing the Strait of Hormuz which creates further uncertainty.  However, gold is still a couple of dollars lower this morning.

–On Friday, the Fed Effective rate set at 2.44%, 4 bps above IOER.  This data was released yesterday morning and sparked heavy selling of FFK9 which settled 9757.5.  As a result  May/July FF spread settled -4.5 (down 3 on the day), while Aug/Oct settled -5.0.  Does this mean that an ease in June is nearly the same probability as one in Sept?  No, it’s just a response to a jump in Fed Eff (which covered the weekend).  The broader issue is that lib/ois and other ‘stable’ relationships are now increasingly subject to technical factors that cause squeezes of various sorts.  Unsurprising to see EDU9 and EDZ9 straddles each gain 1 bp to settle at 16.5 and 26.0.  And it’s not because the market laments the loss of the steady hand and intricate policy knowledge that Herman Cain would have brought to the Fed. 

–During the last crisis, housing was torpedoed by subprime mortgages and low equity to loan ratios which somehow slipped past zealous rating agencies. Now, equity as a percent of value has rebounded all the way back to respectable pre-crisis levels as the chart below shows.  But residential real estate is still sluggish at best.  It’s not a crisis but declining home sales are still a drag on the economy at large.  Today features New Home Sales expected 650k, -2.6%.  

Households Owner Equity in Real Estate as % of value
Posted on April 23, 2019 at 5:15 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

Stocks and oil diverging

April 22, 2019

–Stocks are in retreat after a solid close on Friday, diverging from WTI crude this morning as the latter has surged $1.50/bbl to over 66.50 on news that the administration is tightening sanctions on global purchases of Iranian oil.  Higher gasoline prices are likely to be a cloud over growth in the short term even as they help the Fed reach its all-important inflation objective.  

–Yields are a bit higher this morning with tens pegging the 123 strike, currently 123-025, going into May option expiration on Friday.  This week features 2.5 and 7 year auctions.  

–Conditions should be thin due to Easter Monday, but news still includes the Chicago Fed National Activity index expected -0.15 which would mark the fourth consecutive month of a negative reading.  Existing Home Sales are also released, expected -2.3% to 5.31 million.  Housing Starts on Friday were soft at -0.3% with February revised down to -12.0%.    

Posted on April 22, 2019 at 5:07 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

Weak Housing, Lower Rates

April 21, 2019 – Weekly

On the week, prices didn’t change all that much.  The US ten year yield barely budged, ending Friday at 2.556%, even though the Fed is working hard to communicate a new plan to allow inflation to overshoot in order to catch up with previous shortfalls. While yields have generally been increasing throughout the month of April, Thursday’s price action was somewhat interesting, in that rate futures rallied in spite of stronger than expected retail sales data and jobless claims that have fallen to their lowest level since 1969. Of course, on Saturday morning’s WSJ site there’s this headline:

Fed Officials Contemplate Thresholds For Rate Cuts

As can be seen on the chart below, TLT, an etf which tracks the market-weighted index of US Treasury debt with remaining maturities over 20 years, traded huge volume on Thursday, three to four times normal, causing a modest bounce in price.  Why the demand for the long end?  Perhaps it’s simply an anomaly, as treasury futures volumes weren’t particularly high.  Or maybe the market is sniffing out the possibility of rate cuts and more QE around the corner.  Near term cut odds have been trimmed recently, with January 2020 Fed Funds at 9772.5 or 2.27%, essentially projecting a 50/50 chance for an ease by the end of this year.  But flows still favor the Fed’s next move as easing.

TLT – long bond etf- heavy volume Thursday

It’s worth noting that the US dollar index continues to exhibit strength near a two year high, and that stocks are also seeing solid demand.  It’s pretty amazing to see VIX languishing just above 12 when the upcoming week features earnings reports from over 1/3rd of the SP500.  Large companies reporting include AMZN, FB, MSFT and XOM. (Just those 4 companies have a combined market cap of $2.7tr).  

On Friday, housing data was released and showed surprising weakness of -0.3% month over month, with February revised to -12%!  YOY housing starts have fallen to -14.2%.  The chart below indicates the turn, even as the long bond remains below 3%.

Interestingly, the NY Fed released a note on housing on 15-April, titled ‘Is the Recent Tax Reform Playing a Role in the Decline of Home Sales’.  In short, the answer is yes.  The paper compares three recent periods of similar mortgage rate increases, noting that from Q4 2017 thru Q3 2018, the 30-yr fixed rose about 70 bps.  “During this same period, there was a broad-based slowing in housing market activity with sales of new single-family homes declining by 7.6% while sales of existing single-family homes fell by 4.6%. Interestingly these sales were larger than in the two previous episodes when mortgage interest rates rose by a comparable amount.”  The paper notes that the largest declines were in the highest priced homes. 

Here are a couple of other excerpts:

In the next section we present analysis of the recent period focusing on high-priced homes in areas with higher tax rates. We assume property taxes are 2.5 percent of the home value, which is typical for a high-tax jurisdiction, and that the amount borrowed to purchase the home exceeds the cap of $750,000, which is often the case for homes in higher price ranges. This means that the mortgage interest is no longer deductible at the margin, raising the effective mortgage rate by 2.2 percentage points. Under these assumptions, the cost of capital appears to increase from around 1 percent to 5 percent for these homes. 

While certainly not conclusive, the evidence presented above is consistent with the view that changes in federal tax laws enacted in December of 2017 have contributed to the slowing of housing market activity that occurred over the course of 2018. Specifically, this slowdown stems from a higher user cost of capital caused by lower marginal tax rates, the $10,000 cap on the deductibility of state and local taxes, and the lower limit for the amount of mortgage debt on which interest payments are deductible.

On a broader scale, much of the economic discourse following the passage of the tax act concerned the idea of a ‘sugar high’.  Inventory build to beat tariffs also played a role.  While the labor market remains extremely strong, other data indicates deceleration, a sign of dissipation from the tax package (even ignoring the negative effects on high-end housing).  Obviously, the Eurodollar curve is already projecting a further slowdown with the first seven one-year Eurodollar calendar spreads being inverted.  The lowest is still EDZ9/EDZ0 which closed the week at -26.0.


May treasury options expire Friday.  Thursday’s settlement was 123-045, and the previous Friday was, 123-03.  The May 123 straddle went from 38 on Friday to 29/64s on Thursday.  On April 12, the previous Friday, there was a new buyer of 75k TYK 123 call, and this is still the strike with the second largest amount of open interest at 130k while the peak 124c has 142.6k open.  On the put side, TYK 123p has the most open interest at 110k.  I’m going to go out on a limb and say TYM by Friday will be between 123 and 124.   Friday’s settles: 123c 19 and 123p 10, with TYK 123.5c 6 and 122.5p 2. 

Skew leans heavily toward calls.  For example, consider EDH0 which settled Thursday at 9756.5, up 2.5 on the day.  With futures almost exactly between strikes, the 9762.5 straddle settled 36.0, while the 9750 straddle settled 33.0.  Even more illustrative, EDZ9 was essentially unch’d on the week at 9746 from 9745.5 the previous Friday.  The 9700p settled 0.5 while the 9800c settled 2.75 even though further out of the money. 

4/12/2019  4/18/2019
UST 2Y 239.3 238.2 -1.1
UST 5Y 237.5 236.8 -0.7
UST 10Y 255.8 255.6 -0.2
UST 30Y 297.2 295.9 -1.3
GERM 2Y -55.9 -57.4 -1.5
GERM 10Y 5.5 2.5 -3.0
JPN 30Y 51.6 55.5 3.9
EURO$ Z9/Z0 -25.0 -26.0 -1.0
EURO$ Z0/Z1 -2.5 -0.5 2.0
EUR 113.01 112.34 -0.67
CRUDE (1st cont) 64.02 64.07 0.05
SPX 2907.41 2905.03 -2.38
VIX 12.01 12.09 0.08
Posted on April 21, 2019 at 6:59 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

Stocks running out of gas?

April 18, 2019

– -Once again, little net change in interest rate futures, though the curve had a steeper bias in the wake of a Bloomberg article indicating the Fed is embracing the idea of letting inflation catch up with previous shortfalls.  2/10 notched a slight new recent high at 19 bps, up 1.2 on the day.  In eurodollars, there was early buying in deferred out-of-the-money put spreads: +30k 2EN 9725/9687ps for 1.0 and +15k 3EN 9725/9687ps for 1.5.  Both settled 1 vs 9770 in EDU21 and 9762 in EDU22.  EDM9 and EDU9 settled -0.5, all other ED contracts were unch’d to +1.0.

–Equity index futures provided a much more interesting technical backdrop, though ranges weren’t particularly large.  ESM and Russell posted outside days with the former making a new high for the move early yesterday morning.  Both closed lower.  Nasdaq made a new high and closed higher on the day.  This divergence, with speculative flows seeking the ‘safety’ of big tech, may not bode well for the short term prospects of the broader markets.

–Once again German manufacturing data was weak, with the PMI at 44.5, which has provided a bid in fixed income.  Markets are closed tomorrow and may be somewhat illiquid this afternoon.  Today’s news includes Philly Fed expected 10.4 vs 13.7 last.  Retail Sales +0.9; an expected bounce from last month’s weak -0.2.  

–An article on Reuters cites a speech by the NY Fed’s Lorie Logan as saying the Fed may need to buy more bonds than it required pre-crisis.  Not particularly surprising from an operational standpoint, but here’s a link to the speech for anyone needing a nap,https://www.newyorkfed.org/newsevents/speeches/2019/log190417

Posted on April 18, 2019 at 5:09 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

Make up

April 17, 2019

–Nasdaq futures at a new high this morning.  China’s Q1 growth better than expected at 6.4% while Germany has cut its forecast for 2019 growth to 0.5 from 1.0%.  It was in late March that a weak German mfg number helped send yields plunging, but TYM is at a new low for April at 122-22+, having completely erased gains.  Yesterday tens rose 3.7 bps to 2.59%.  The eurodollar curve steepened with reds -3.625, greens -4.375, blues -4.875 and golds -5.25.  An article on BBG this morning says that Powell has now “adopted” the inflation make-up strategy that has been repeatedly mentioned in Fed speeches; that is, the Fed will allow inflation to exceed the 2% target to make up for past shortfalls.  I’m not sure the Fed is all-in on the approach, as one of the conditions is that the public must view the plan as “credible” rather than, let’s say, “stupid”.  Mr President, we at the Fed have taken our foot off the brake (and our hands off the steering wheel).  Let’s try the new self-driving technology.   

–In any case, IF the Fed is embracing this strategy, it should be seen as an engraved invitation to steepen the curve.  Could long bond prices become unruly?  Right now, option premium levels suggest not, but I’m not going to be the first one to offer cheap bond puts.  It wasn’t all that long ago that someone had paid up to 10 (if memory serves) for 60k USM 139/140 put spreads.  Now that put spread settled 1 with 140 puts at 4 ref 146-11.  I am more inclined to be a buyer at that level; China’s ten year yield has already broken out to the upside, having rallied from 3.07% to 3.43% in the month of April.  A move of 36 bps in the US long bond contract would be over 6 points lower as a back of the napkin calculation.

–Beige book today. 

Posted on April 17, 2019 at 5:14 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

From the ashes

April 16, 2019

–Little movement in rates yesterday.  Market events were overshadowed by the heart-breaking fire at Notre Dame at this time of resurrection. 

–This morning, US stocks are responding to a surge in Chinese shares, with Shanghai Comp bouncing nearly 2.4%.  

–Brexit talks continue to drag on.  The original vote was June 23, 2016, nearly three years ago.  At that time SPX tested 2000, now 2900.  GBP traded down to around 1.30 before making an ultimate low in fall of that year below 1.20.  It’s now 1.3078.

–It was Chicago Fed’s Evans turn to communicate the central banks’ new and improved plan to let inflation overshoot.  He said rates could stay here until fall of 2020.  Once again, markets tend to interpret that message as, “Oh, the Fed wants stocks to go higher.” No matter how nuanced the communication strategy, some things can’t be ‘fixed’ with monetary policy.  As surprising as it may seem to some, the shares of companies that lose money might still decline.  Lyft now down 22% from its IPO price.  A bear market.  

–Industrial Production today expected -0.2.    

Posted on April 16, 2019 at 4:58 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

Gold charts…

April 15, 2019

Top chart is June Gold which is tracing out head and shoulders top; target 1226 if the neckline is broken.  It’s at the low of the year, not too surprising given dollar strength and an embrace of risk (again). 

What is somewhat odd is the longer term chart below, the gold/silver ratio overlaid with SPX since the year 2000.  The gold silver ratio is at a level associated with peak panic in financial markets.  Seems like the trade might be to sell gold/silver here, or maybe buy silver and sell stocks?? 

Posted on April 15, 2019 at 7:44 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

Wait and see

April 15, 2019

–Rate futures closed on the lows Friday and have seen no bounce this morning.  Both red and green ED packs settled -7.625.  Tens were up 5.6 bps to 2.558%.  There was sizable buying of TYK 123/124 call spreads on legs for 20 to 21, settled 19 ref 123-03.  Open interest in in the lower strike was up 59k (new buyer) and up 34k on the 124 strike (exits followed by new sales).  May treasury options settle one week from Friday.  

–Gold is testing new lows for the year and silver is at a new low, in an apparent unwind of safe-haven bets as the dollar remains strong.  Oil has pulled back about 50 cents this morning.  However, last print on April bitcoin is 5160, +95 on the day.  

–Trump is again pressuring the Fed and saying stocks would be much higher if not for tightening.  Nervousness about the central bank’s independence is rising in some quarters, though those concerns aren’t really showing up in the markets.  Several reports indicate that the US is softening some conditions in order to move US/China trade talks forward.  –Jan20 Fed Funds settled 9772, indicating 50/50 odds for an ease by year-end.  The first three euro$ one-year calendar spreads are -20, -22.5 and -25.0 with the latter being EDZ19/EDZ20, the lowest spread on the board; all consistent with the idea of one rate cut going forward.  The highest prices on the ED curve are the greens, specifically EDU21 at 9774, a rate of 2.26%, 34 bps under the current libor setting.  US rate markets continue to lean towards ease, but are in a ‘wait-and-see’ mode.  

Posted on April 15, 2019 at 5:14 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options