May 23, 2019

–Weakness this morning in equity futures, especially the small cap Russell (RTYM9) which is testing last week’s low, currently at 1520.  Oil is also testing last week’s lows with CLN below $61/bbl.   The realization of no quick resolutions to the trade impasse has settled over the markets.  Treasuries are bid; with June option expiration coming Friday, it appears as if the 125 strike could come into play, TYM9 currently 124-205.  Apart from trade issues, the debt ceiling is starting to get some attention, with Mnuchin warning of a late-summer default if the limit isn’t raised.  And, with european elections coming up, EUR is pressing new lows.  One of the analogies that I find is overused is “the perfect storm” but what the hell, this could be it.  Yuan weaker, Turkish lira weaker.  

–Summaries of the Fed minutes concluded there would be no rate cuts for ‘some time’.  May 1 to July 31 is 13 weeks, or 91 days.  Those are FOMC dates, with another one in the middle on June 19.   That qualifies for some time.  Will a meeting between Trump and Xi in late June keep the Fed on the sidelines in June?  Probably.  The July/Aug Fed Fund spread settled  -1.75 yesterday.  Anything above -2 is probably a sale [THIS IS NOT RESEARCH OR A RECOMMENDATION].  At the end of December Tesla was 375.  Yesterday it ended at nearly half that level, closing at 192.  Sentiments change.  I think I saw a BBG headline saying that an extended trade war is now becoming a base case for many forecasters.  I think base case is pretty much the opposite of transient.  

–By the way, the ten year treasury to inflation-indexed note spread is at a new recent low of 180 bps, not having been this low since late January.  It started the year around 170, firmed to nearly 2% as stocks recovered, but is now fading again.  This Fed has fixated on inflation expectations, whose decline is just another headwind.  In the storm.  That’s coming.  I’ll stop now.

Posted on May 23, 2019 at 5:10 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

FOMC minutes. It all hinges on “transitory”

May 27, 2019

–FOMC minutes from May 1 this afternoon.  Bullard spoke earlier, saying the Fed could still cut if inflation data falls short, even if growth numbers are firm.  The May press conference was where Powell deemed several of the factors holding down inflation to be “transient” so it wouldn’t be surprising to see a slightly hawkish tilt to the minutes. The question is whether the Fed is adhering to that view as USD maintains its strength.

–The contract with the most open interest on the eurodollar strip is EDZ9, with 1.612m, up nearly 17k yesterday.  Next closest is EDU9 with 1.477m. There was heavy buying of EDZ9 9787c, for 7.0 covered 9762.0 and as part of the 9787/9837c spread.  Settled 6.5 vs 9760.5.  These are new buys with OI +36.7k.  This strike requires a couple of eases by year-end to be in the money.  Fed fund contracts trimmed odds of easing this year, with FFF0 down 3.5 bps to 9785.5, almost exactly one-quarter pct lower in yield than the expiring May contract at 9760.75.   

–Curve flattened yesterday, with the 2y up 3.5 bps to 2.256 and tens +1.4 to 2.426. –The US administration is threatening further tech blacklisting.  However, copper is at a new low this morning 2.6975 HGN9, having ticked as high as just over $3 in the middle of April.  A decline of around 10% in a month.  

Interesting Reuters report on Huawei (thanks Marco)

Posted on May 22, 2019 at 5:12 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

No risk in corporate debt *UNLESS THERE’S A DOWNTURN

May 21, 2019

–Yields backed up modestly yesterday with tens +2 bps to 2.412% and reds through golds -2.0 to -2.5.  The administrations is apparently softening some restrictions on Huawei, leading to a small bounce in risk assets.

–Not much new in Clarida’s comments yesterday.  He repeated that the neutral rate is low and said that inflation has been less responsive to resource slack.  Last night, Powell gave a balanced speech about the risks of corporate debt.  Though attuned to the risks, he doesn’t believe they pose a threat as compared to the subprime crisis.  However, he did acknowledge that a downturn in the economy would bring significant stress to some companies.  From the speech: ” Business debt relative to the size of the economy is at historic highs. Corporate debt relative to the book value of assets is at the upper end of its range over the past few decades. And investment-grade corporate debt has shifted closer to the edge of speculative grade.”  He concludes that the present situation doesn’t present notable risks to financial stability.  Clearly, the Fed is monitoring the situation.  While Powell says that the US financial system is better able to withstand stress, I have attached a chart of Deutsche and the Italy Bank index.  Financial spillovers are hard to quantify.

–Also I have attached a chart from the St Louis Fed which shows a pretty significant drop in Commercial and Industrial loans this year after strong growth in 2018.  A temporary pullback or a sustained fade of last year’s stimulus?

–Yesterday’s largest trades were replacement of wings as June options expire Friday.   For example, TYQ 133c bought for 2 in size of 100k.  TYQ 132 thru 134.5 calls all settled 2.

–Powell speech link:

Posted on May 21, 2019 at 5:01 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

Chicago Fed National Activity

Posted on May 20, 2019 at 9:37 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

Fed talks

May 20, 2019

–Equity futures opened higher last night but have now reversed into negative territory as news headlines splash stories about the fallout from Google cutting Huawei’s access to critical products.  Oh, and the US sailed a warship near the Scarborough Shoal which China claims in the South Sea, prompting a warning from Beijing to stop “provocative actions” (according to the South China Morning Post).  And, the US ambassador to China scheduled a visit to Tibet just for good measure.  Big hitter, the Lama.  Finally, Trump threatened the end of Iran, if it chose to fight with the US.  Copper near new lows.  Oil a bit higher.  Bitcoin surged over 700 to re-test 8000.  
–Speeches today by Fed officials.  Clarida at 1:05 on the Fed’s communication strategy, and at 7:00 pm Chairman Powell will discuss ‘Risks to our Financial System’.  This morning brings the Chicago Fed National Activity Index, expected -0.33 from -0.15 last.

–Friday saw yields edge a bit lower with tens down half a bp to 2.393%.  Reds through golds +1.0 to +1.5.  Early in the day, July/Aug Fed Fund spread traded as low as -5.0 (settled -4.0), an indication that odds are rising for a possible ease at the July 30 FOMC.  The most negative spread is Aug/Oct at -8.5. which targets the Sept FOMC as the most probable time for a Fed cut. 

Posted on May 20, 2019 at 5:14 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

Fed Listens. Does it Hear?

May 19, 2019

Weekly Comment

On the week, both US and German ten year yields fell 6 bps, US to 2.393% and Germany to -10.4 bps. The German bund yield is now 5 bps lower than Japan’s JGB, which ended the week at -5.2 bps.  Of course, Germany runs a budget surplus while Japan runs a huge deficit and buys every available bond.  Switzerland’s ten year yield is -40 bps.  US swap spreads have been trending lower since the middle of 2018, with the 2 yr at 6.25 bps, just holding barely above the historic low of 4 bps in late 2015.  The 5 yr posted a low of -11 in 2015 and was slightly above +15 in 2018, and is now just 1.2 bps.  The 10 yr hit +8 in 2018 and is now -4.6.  In 2015 markets were in the midst of a commodity and emerging market sell-off.  SPX was around 2000. 

Three month libor is 2.52%, three month bills are 2.33% and again, the ten year is 2.39%.  In its “Fed Listens” initiative, the Fed seems to spend a lot of time discussing a low and falling neutral rate while, at the same time, trying to talk up inflation expectations.  Officials have repeatedly trotted out the idea of letting inflation ‘overshoot the 2% target’ while holding policy steady.  It reminds me of the philosophical question, “If a tree falls in the forest and no one is around to hear it, does it make a sound?”  If the Fed keeps talking about boosting inflation expectations and no one listens, do yields have to fall?  When Powell became chairman, some commentators derisively noted that he wasn’t trained in economics, yet Powell’s Fed seems fixated on the theoretical constructs of the neutral rate and household expectations.  Maybe that’s not exactly fair – when Powell became the Chairman, I think he genuinely wanted to separate the economy from the iron grip of over-valued asset prices which had become entrenched due to low funding rates  He was attempting, I think, to move the economy away from Wall Street and back to Main Street.  Events have overwhelmed this Fed. 

Perhaps now the Fed will have to spend a bit more time on global financial plumbing.  All sorts of prices don’t seem to make a lot of sense.  In a recent interview, Jeffrey Gundlach was literally nearly pounding on the table expressing the view that bond vol is too low.  The May tweak to IOER was a nod in the direction of unbalanced monetary flows.  The unrelenting rally in back eurodollar contracts and in treasuries sends a powerful signal.  On the eurodollar curve, EDH21 is now the highest contract, having traded above 98.00 this week and settled at 97.99.  Since the middle of November, this contract has rallied 125 bps and it’s 50 bps below the current libor setting.  In contrast. March’21 euribor has rallied about 60 bps since November, and is now 100.25.

The Fed points to all sorts of legitimate reasons for the neutral rate to be under pressure.  Brainard in her last speech said, “the decline in the neutral rate likely reflects a variety of forces globally, such as the aging of the population in many large economies, some slowing in the rate of productivity growth, and increases in the demand for safe assets.”  Huh?  It’s equally plausible to say, ‘the unemployment rate is increasing because advances in technology and robotics are replacing jobs and holding down costs.’  Except that the unemployment rate is at a record low and all sorts of firms complain that skilled labor is in very short supply.  By the way, Brainard’s May 16 speech was titled ‘The Disconnect between Inflation and Employment in the New Normal.’ [link below] It seems to me that the Fed is now in the reactive position of trying to fit its analytical framework around market actions.  I think that some of these overwhelming market forces are a direct consequence of the zero-rate balance sheet expansion. 

However, before continuing, it’s clear that the most immediate impact on markets has recently become the geopolitical trade wars.  US equity markets bounce around with each and every ‘good cop/bad cop’ tweet out of the administration.  However, the Chinese side appears to have lost patience with this approach and has slowly moved in one direction: harder.  This past week, the state broadcaster CCTV anchor Kang Hui said, “If you want to negotiate, the door is open.  If you want a trade war, we’ll fight you to the end.  After 5000 years of wind and rain, what hasn’t the Chinese nation weathered?”  According to a few news reports, that video was viewed over 3 BILLION times.  Sounds like a little more than a squabble to me.  Over the weekend the South China Morning Post said China is ‘in no rush’ for another discussion with Mnuchin until the US becomes more realistic.  The yuan is close to testing the psychological 7 level.     

Now, back to our regularly scheduled programming.  This next chart isn’t really one for the Fed to ponder, it’s just a surprising item that was brought to my attention (thanks TW).  It shows a new high in the gold/silver ratio.  According to one article, 50% of silver’s demand is for industrial applications.  So maybe this chart simply portends a further slowdown in the global economy. Or perhaps it reflects a demand for ‘safe assets’ (by Russia) for gold and bitcoin, which, according to Brainard, feeds into a lower neutral rate.  Yeah.  That’s it.  In any case, I don’t care to think too much about the implications of this one.  Except that maybe we should be looking at buying silver!

I reviewed an article written by Zoltan Pozsar of Credit Suisse from mid-February.  At that time, he forecast that libor/ois spreads might tighten dramatically as funding costs relative to the treasury curve HAD to come down in order for the market to absorb significant increases in US supply.  The current forward OIS/libor prices as indicated by the futures markets reflect this tightening.  For example, EDM9/FFN9 has come down to 15.25 bps (9748.25 vs 9763.5).  EDU9/FFV9 is 16.5 (9759.5 vs 9776.0).  EDZ9/FFF0 is still 25.5 (9765.0 vs 9790.5).  The main point of Pozsar’s note was that the US curve had to steepen rather dramatically in order to maintain sufficient foreign and domestic demand for increased auctions.  The way that this adjustment has occurred is apparently through forward contracts (i.e. eurodollar futures) strongly inverting relative to the front end of the curve.  While the Fed has been talking about inflation expectations, the curve has signaled the adjustment that Pozsar forecast in February.  The market is telling the Fed that it has to continue down the 2019 path of more accommodative policy, and that rate cuts are a part of that equation.  With October Fed Funds settling at 9776.0, 15 bps lower in yield than the front May contract (FFK9 = 9761), there is a 60% chance of an ease by September. (EDM9/EDU9 at -11.25 isn’t quite as aggressive).  FFF0, the January contract, indicates certainty of at least one ease by the end of the year; at 9790.5 it is 29.5 bps below the front May contract. 

In the absence of a resolution of the trade impasse, will a more accommodative Fed reinvigorate the stock market?  Perhaps to some degree, but rate markets are already pricing this eventuality.  Is it the Fed’s job to cushion the economy from political decisions?  Maybe it is, in a reactive sense.  But clearly one of the Fed’s objectives is to make sure the financial gears don’t start to lock up, and this latter concern is likely to become much more important over the medium term.     

Note that on Monday, as part of the ‘Fed Listens’ program, NY Fed’s CEO and President, John Williams, is expected to give introductory remarks and Vice-Chair Clarida will give a speech on Monetary Policy Strategy, Tools and Communications. At 7:00 pm EST, Powell is slated to give a speech titled “Assessing Risks to our Financial System”.  I would expect the emphasis to be on global financial risks that might feed into the US economy.


June treasury options expire on Friday.  TYM9 settled Friday at 124-155.  Peak June call open interest levels are at the 124.5 and 125.0 strikes with 100k and 128k respectively.  I expect a test of the 125 strike sometime early in the week.  TYM9 125c settled 4/64’s.  A couple of weeks ago I suggested that TUM9 might re-visit 106-24 from late March.  Settled Friday at 106-18.75.  While there has been pressure on the June contract due to heavy selling in the M9/U9 roll, odds favor a further grind higher. 

Near Eurodollar one-year calendars posted new recent lows this past week with EDM9/EDM0 hitting -43.25.  Odds favor further inversion.  The reds have shown relative strength.  Although the red/green pack spread is slightly inverted at -1.125 bp, the 9800 midcurve straddles are nominally higher in reds as compared to greens.   For example, 0EU9 9800^ settled 35.5 with EDU20 at 9795.5, while 2EU9 9800^ settled 32.5 vs EDU21 9797.5. 

There was large buying of Oct 9800/9825 call spreads last week; total position around 80k.  Settled 2.25 ref EDZ19 9765.0.  A lot can happen in five months. When the Fed becomes forced to ease, it can occur quickly.  I don’t see any chance that the first move could be 50 bps, but I would not be surprised at all by two cuts of 25 at consecutive meetings.  I think it would take an ‘event’ but it feels like one is getting closer. 

5/10/2019 5/17/2019 chg
UST 2Y 225.0 220.0 -5.0
UST 5Y 224.7 217.8 -6.9
UST 10Y 245.3 239.3 -6.0
UST 30Y 287.4 282.4 -5.0
GERM 2Y -61.6 -64.6 -3.0
GERM 10Y -4.5 -10.4 -5.9
JPN 30Y 53.4 52.4 -1.0
EURO$ Z9/Z0 -26.5 -31.0 -4.5
EURO$ Z0/Z1 1.0 1.0 0.0
EUR 112.35 111.59 -0.76
CRUDE (1st cont) 61.80 62.92 1.12
SPX 2881.40 2859.53 -21.87
VIX 16.04 15.96 -0.08

Posted on May 19, 2019 at 1:49 pm by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

The reflation welcome mat

May 17, 2019

–Yields edged a bit higher yesterday with tens +2 bps to 2.398%.  Red pack was weakest on the dollar strip falling 5.0; greens through golds were -4.5 to -3.0.  Just a minor rise in yields causes USD strength which is in turn, deflationary, and should be a negative for US equities.  Maybe that narrative doesn’t quite hold, but stocks are a bit weaker this morning, supposedly due to souring trade talk.  Interestingly, Brainard and Kashkari both made comments yesterday regarding the idea of a ‘welcome’ overshoot in inflation.  Kashkari thought it might come through increased wages and Brainard, through increased import prices.  Brainard opined that the Fed might sit back during this “opportunistic reflation”.  At the same time, currencies are opportunistically adjusting to absorb potential price increases.  For example, the Korean won has weakened consistently from the end of April when trade talks broke down, from 1140 to 1196 this morning.  The Chinese yuan has also fallen this morning to a new recent low, now at 6.915.  A story on Reuters cites officials as saying China will use reserves to prevent CNY from piercing 7.0.  Know what that means?  It’s going straight to 7.  In the same way, Trump says he hopes the US can avoid war with Iran.  Know what that means?

–It’s true that import prices might go up due to tariffs and a decline in global trade. but strength in USD and possible faltering in US stocks is a major counterbalance.  And while the Atlanta Fed wage tracker has gently firmed over the past six years of so, it shows little sign of acceleration in spite of record low unemployment rates.  

–This morning brings Leading Indicators expected +0.2 and U of Mich sentiment numbers. 

Posted on May 17, 2019 at 5:19 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

Pushing for an ease

May 16, 2019

–After weaker than expected Retail Sales and Industrial Prod data, the Atlanta Fed GDP Now forecast for Q2 was trimmed to 1.1% from 1.6.  Today’s news includes Housing Starts 1209k, Philly Fed expected 9.0 and Jobless Claims.  In a continuing escalation of the trade skirmish, the US blacklisted Huawei.  As the yuan is naturally pressured to partially absorb declines in trade, it becomes much less likely that a deal will come to a quick resolution as the US will accuse China of ‘manipulation’. Of course, the Korean won has also done nothing but decline since the trade talks fell apart.

–The bid for treasuries remains relentless with yesterday’s gains holding.  USM currently trading at a new high above 150.  Important levels from the end of March are being tested or surpassed. For example, 5/30 yesterday matched the March 27 high of  67 bps.  At that time. red/gold euro$ pack spread had settled 25.375, now 24.875.  The first three one-year calendars at end of March had posted lows of -42, -38.5 and -34.  Now -43.25, -37.5, -32.  Jan 2020 Fed Funds rose 2.5 bps yesterday to a new high of 9793.0, 32 bps lower in yield than the spot May contract (9761).    All near 3 month euro$ calendars posted new recent lows, with the lowest being EDZ9/EDH0 at -15.0. 

Posted on May 16, 2019 at 5:15 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

Yields Press Lower

May 15, 2019

–In spite of a solid bounce in stocks yesterday, rate futures are at new highs this morning with TYM printing 124-20 (+9.5) and the highest contract on the euro$ curve, EDH21, just printing 9801 (+4.5).   EDH21 prints 50 bps lower in yield than the current libor setting.  Weaker than expected data out of China was a contributor.  Retail Sales +7.2% and Industrial Prod +5.4; nominally big numbers but both much lower than projected.  Quite different from the same data being released today in the US:  Retail Sales expected +0.2 and Ind Production +0.1.  

–Following Salvini’s threats yesterday to ignore the EU’s budget rules, Italian bank shares continue to fall, with the bank index 1.25% today and off 14% from last months high.   

–June treasury options expire a week from Friday.  On the call side, TYM 125 strike has the most open interest currently at 123k, soon to be the atm strike.  Implied vol declined in rates yesterday as stocks rallied, but rate futures and spreads reflected little confidence in a sustained boost in equities as prices barely changed.  EDM9/EDM0 closed right at the recent low of -37.75 and EDM9/EDU9 settled at a new low of -11.25. 

 –Treasury calendar rolls becoming more active in shorter maturities due to negative carry and delivery risks.  About 14% of 2’s and 8% of 5’s have rolled so far.

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

Stuck in neutral (on the peak of a hill)

May 14, 2019

–When asked about the implications of a full blown trade war, Warren Buffet unequivocally said, “It would be bad for the whole world.”  US stocks are certainly following the script, with SPX falling 2.4% and Nasdaq 3.4%.  In spite of a threat by China to trim US Treasury holdings, the ten year yield fell 5 bps to 2.403%.  China is taking a negotiating tactic from Trump and lobbing outrageous claims to keep markets off-balance (while quietly letting CNY fall to a new low, 6.88 this morning).  However, treasuries remain the biggest and most liquid safe haven.  Bitcoin, on the other hand, is acting as an illiquid safe haven, having leapt from $5000 at the end of April to a new high of $8170 this morning.  Gold has also shown a spark, closing above 1300 and breaking a downward sloping 3 month trendline (GCM9).  Finally, Corn made a new low but had an outside day and closed higher, a sign of a short covering squeeze to come. 

–Williams joined a chorus of other Fed officials in noting that the neutral rate is low, and further added that the central bank should prepare for slow growth.  Nice cheerleading effort.  

–In terms of levels, some markets have pierced late March spikes and some have not.  For example, FFF0 settled at a new high of 9791.5, more than 25 bps lower in yield than the current Fed Effective (projecting at least one ease by year end).  Aug/Oct Fed fund spread closed -8.5, signifying about 1 in 3 chance of a hike AT the Sept meeting.  The spread between May and Oct is -15.75, so that indicates a chance of around 60% that the Fed eases BY Sept.  As mentioned over the weekend, when things start to get bad the Fed eases quickly; it’s a lot easier for reds to rally 10 than decline 10, and that’s what the call skew has been reflecting.  A large trade yesterday underscores that sentiment: new buyer of 50k EDV 9800/9825 c spreads up to 2.5 (settled 2.25 vs 9765.5 in EDZ9).  This trade needs 2 or 3 eases…but the Fed keeps talking down the neutral rate for a reason:  It’s because they are preparing to ease, or at least letting the markets know it’s probable.  Kashkari is the only one that didn’t get the memo, saying no cuts are necessary because the labor market is strong.

–One year ED calendars didn’t quite take out late March lows.  The cheapest is again EDM19/EDM20, the front spread, which settled -37.75 vs a low of -42 in March.  The peak contract is EDH21, which settled 9797. just shy of the 2% strike.   VIX well through March highs, now 19, but stock indexes haven’t quite taken out March lows.  Chance of reprieve with turnaround Tuesday…

Posted on May 14, 2019 at 5:21 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options