What in the Wide Wide World of Sports is going on here?

May 2, 2019

-Back in the 1970’s, a sports show aired on TV called The Wide World of Sports.  It featured the memorable tagline voiced over grainy images:
The thrill of victory.  The agony of defeat.
Here’s an intro clip.

 –Yesterday, for the bulls it was exactly that.  A brief grasp of victory, followed by an agonizing sell off.   

–It was an interesting session from the start, with Mfg ISM coming out lower than expected at 52.8, with Prices Paid at just 50.0 (vs  55.0 expected).  Rate futures remained well bid in the wake of this data.  I recall back in 2015 saying that the Fed had never hiked with Mfg ISM sub-50, but of course that’s exactly what they did in Dec 2015 (the first hike in this now officially ended cycle; officially in my opinion anyway).  Now with ISM holding over 50, should they ease?  Well, that’s not exactly what they did, but for a spontaneous moment the market took the 5 bp cut in IOER to 2.35% from 2.40% as a broader policy signal rather than a technical modification.  Red eurodollars traded to +5.5 bps!  However, the elation in both stocks and bonds was fleeting, with hard reversals into the end of the day.  Red eurodollars settled -4.625 on the day and were -6.0 late.  Stocks also had a reversal with ESM9 making a new contract high before dumping 40 points from that level into the close.  Stick a fork in it…sell in May and go away.

–The Fed fund calendars revealed the extent of hopes for ease: FFN/FFQ spread traded as low as -5.5/-5.0 post announcement before being lifted at 5 in 4k and settling at -3.5.  This spread targets the July 31 FOMC.  The spread that isolates the Sept FOMC, FFQ9/FFV9, got down to -8.5/-8.0 (1 in 3 odds of an ease) before coming back to settle -5.0.  As near term easing hopes surged and then deflated, the curve flattened.  Reds -4.625, greens -2.75, blues -1.375, golds -1.0.   In treasuries, 2/10 gave back 2.8 bps to close 21.1.  Powell didn’t express much concern about the decline in inflation, citing transitory factors.

–However, worrying signs emerged.  For example, copper took a large tumble (HGN9) with a 3.5% decline on the day, breaking out to the downside from a two month range.  Gold is down $12 this morning testing the recent low, and oil is likewise closing in on last Friday’s low. 

–In eurodollars as in Fed Funds, calendar spreads ultimately pared back easing expectations.  EDM9/EDM0 traded as low as -34 before coming back to settle -25.5.  The low settle at the end of March was -42.0.  Once again, EDZ9/EDZ0 takes the crown as cheapest one-year spread on the board, settling -27.5.  We’re now in a ‘position adjustment’ trading environment of gradually paring back the froth associated with hopes for a near term ease.  Tomorrow’s wage data will be important in this context. expected yoy 3.3% vs 3.2 last.

By the way… googling the “Wide wide world of sports” takes you back to another 1970’s anachronistic throwback….Blazing Saddles.

Posted on May 2, 2019 at 5:01 am by alexmanzara · Permalink
In: Eurodollar Options

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