It’s a China story

April 1, 2019

–US stock index futures are responding strongly to China’s PMI print of 50.5, a bounce from last month’s three year low of 49.2.  New Mfg Orders came in at 51.4, a five month high.  ESM currently +20.25 at 2858.00.  On the other hand, the German data were dismal.   From Reuters: Mfg PMI fell to an 80 month low of 44.1, down from 47.6 in February. “Both total new orders and export sales are now falling at rates not seen since the global financial crisis…”

–Rate futures are subsequently under selling pressure with a yield rise of 1-3 bps across the curve.  Oil is at a new ytd high.  

–As mentioned yesterday, on Friday there was large buying of EDM21 and EDU21 9800 (both 45 delta) calls at prices up to 33.0 and 37.5.  Open interest was up in both, +29k and +53k.  This player has been taking profit on calls bought Jan 11th, which were long dated 9750 calls (atm at the time) and is now rolling up in strike and out the curve.  

–US news today includes Retail Sales, expected +0.3 both headline and ex-auto and gas.  ISM Mfg expected 54.5 from 54.2 last.  

–On Friday economic adviser Kudlow was on CNBC calling for 50 bps of cuts by the Fed, parroting Stephen Moore.  Jan 2020 Fed funds settled the week at 9785.0, indicating exactly one cut by year end.  In eurodollars, the first three 1-year calendar spreads, June/June, Sept/Sept and Dec/Dec, are -32.0, -30.0 and -28.5, all of which are saying essentially the same thing, that gradual eases are on the horizon.  While the Trump admin is calling on the Fed to add stimulus, actions like NYC’s congestion fee of $11.50 to enter Manhattan, and new real estate taxes work to the opposite effect… 

Posted on April 1, 2019 at 4:55 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

What does Kudlow know?

March 31, 2019 – Weekly

In November the US ten year yield reached a high of 3.20%.  Now it’s 2.40, a drop of 80 bps.  In October, China’s ten year yield was 3.70, now 3.07, a drop of 63 bps.  Japan’s 30 yr yield was 95 bps on Oct 4, now  50, a drop of 45 bps.  On Oct 4, the German bund yield was 56, now -7, a drop of 63 bps.  On Jan 4, the BBB spread hit a high of 204 bps.  Now 162, a decrease of 42 bps. Since early November, EDM21 has rallied over 100 bps.  SPX gained over 13% in Q1, while the Shanghai Comp was up a sizzling 24%. These changes represent a huge easing in financial conditions. As Robert Smith of the Financial Times notes, “The amount of government debt with negative yields rose back above the $10tn mark this week, as central banks abandoned plans to tighten monetary policy.”

On Friday, chief economic advisor Larry Kudlow appeared on CNBC and said the Fed should ease by 50 bps.  He said the administration respects the Fed’s independence but doesn’t want monetary policy to “jeopardize” (a word he used repeatedly) the economic recovery.  Hey Larry, the bond markets have already eased by over 50 bps since the December meeting.  Is it appropriate to cut short rates when the supposed last piece of the inflation puzzle, wages, are accelerating?  Kudlow, and everyone else, knows that monetary (and fiscal) policies operate with a lag, normally cited at around six months.  Short term interest rate markets are more or less pricing in one cut in the FF target by the end of the year, with the January 2020 FF contract settling Friday at 9785.0 or 2.15%, exactly ¼% below the current Fed Effective of 2.40%.  The easing steps taken by China since the start of the year appear to have taken hold (faster than six months, but perhaps distorted in part by the Lunar New Year) as the official PMI rose to 50.5 in March from last month’s three year low print of 49.2.  “Factory output grew at its fastest pace in six months in March… It rose to 52.7 from February’s 49.5, the highest level since Sept 2018.” (RTRS).

According to a piece in ZH citing Chief Investment Strategist Michael Hartnett from BAML, there are five big data points to watch this week to get a sense of Q2: 

  1. March China Mfg New Orders PMI (51.4 actual, a five month high).
  2. March S Korea yoy exports (-11.1 last)
  3. February US Retail Sales (Monday, expected +0.3% MoM)
  4. March US Mfg ISM (Monday, expected 54.5 from 54.2 last)
  5. February German factory orders MoM

I would add the US employment data, which is released this Friday with NFP expected 175k and YoY Average Hourly Earnings again at 3.4%. 

As mentioned, China’s data came out strong.  S Korea exports are out Monday, last at -11.1% yoy vs an expected -10.8%.  Often cited as a global “canary in the coalmine” this bird’s tweets have fallen silent.  “It marked the third straight month of decrease in outbound shipments and the steepest since April 2016” (Trading Economics).  The YoY declines are accelerating, with the last three months -1.3%, -5.9% and -11.1%.  Of particular note, “Exports to China, S K’s top trading partner, contracted 17.4%…”  Here’s a chart from the St Louis Fed’s FRED site.  Although it doesn’t show last month’s steep drop, it gives a bit of historic perspective, with a huge plunge during the GFC.  It also shows the sharp drop in 2015 to early 2016, coinciding with the evisceration of oil prices and emerging markets.  Note that these drops preceded the low yields in global bond markets which occurred in mid-2016. 

YoY seasonally adjusted growth rate, South Korea Exports

One data point that doesn’t indicate looser financial conditions is the dollar index.  As can be seen from the chart below, it has tested the 61.8% retracement of the large decline from the beginning of 2017 to Q1 2018.  That level is 97.87 vs 97.25 currently.  In general the stronger dollar portends global disinflationary pressure.   In late 2014, the dollar index had a strong rally, while WTI crude fell from over $100/bbl to the low 40’s.  As DXY then retraced lower in Q1 2015, WTI bounced to just over $60, and then plunged to a new low around $30 in Q1 2016.  We’re currently at new ytd highs in oil (CLK9 60.14), right at the level seen at the bounce in early 2015.  If price action continues to echo 2015, then oil will have some tough sledding ahead.  By the way, the late 2016 run-up in DXY coincided with the plunge in oil, with the new high in DXY preceding new lows in WTI by a month or so.  Of course late 2015 was a rough time for US equities as well, and for EM.  

Perhaps that’s why Kudlow is (uncomfortably) trying to influence the Fed into more immediate rate cuts than are being priced by the market, even as wage pressures are building.  Because if the dollar starts to strengthen above 97.87 to 98.00, the next stop will probably be 100, with associated moves lower in oil, EM, and *gasp* SPX.  Note that ytd gains in the EEM etf have been solid at 11.7% but have lagged other markets.  At 42.92, it’s not much of a retrace from the tax-cut inspired highs of 52 in early 2018 to the low late last year of 38.

5 year chart of DXY (dollar index)

So why would the administration keep the pressure on the Fed?  It’s too early to juice the economy for the next election.  But parliamentary elections in Europe are in May, and Draghi is gone at the end of October.  Perhaps it’s a race to the bottom in FX. 

I don’t want to cherry pick price declines, but the plunge in Palladium (PAM9) from last week’s high of 1577 to a low close of 1309 is breath-taking, even after the last six month monster rally from 850.  Gold (GCM9) dropped $36 this week, and May Corn fell a whopping 23 cents (6%) from Monday’s high settle of 379 ¾ to Friday’s 356 ½.  New lows in the aftermath of the grain report in spite of massive losses in farmland due to flooding. Lumber hit $659 in Q2 2018, and is now $360, back to levels from early 2017.  OK.  So maybe I am cherry-picking.  But still.

This is already a long note, so I won’t bother with the other data points being released this week.  However, I do have to mention Friday’s trade action in Eurodollar options.  Mid-session, one player came in and “iinhaled” long dated 45 delta calls.  EDM21 9800c traded up to 33.0, with an increase in open interest (new buys) of 29.5k.  Settled 31.75 vs 9787.0.  EDU21 9800c traded up to 37.5, with an increase in open interest of 53k.  Settled 34.0 vs 9784.5.   Just before these buys, EDH20 9737.5 calls were liquidated/sold in size of 22k at 37.5 to 36.5.  These are now 76 delta, in-the-money calls, originally bought on Jan 11 at a premium of around 25.0; EDH20 settled that day at 9740.0   So it’s a LARGE roll-up of calls, net 60k contracts.  As a bit more background, on Jan 11th, a Friday, very late in the session someone came in and bought over 200k long-dated atm calls.  He single-handedly ran prices up on aggressive buys, as filling brokers in the pit raced each other to get their orders filled in thin conditions; the orders had been split among several groups.  This time, the buying was done much earlier, mostly through one filling floor broker.  In mid-January after these buys, yields edged higher, but then the rally ensued.

While there was huge buying of EDZ9 9750/9737/9725/9712 put condors over the past week (from 3.5 to 5.25 recently in size >400k), the upside still has proponents.  Put skew has been hammered, for example EDZ9 9725 puts, with a supposed -0.15 delta, went up 0.25 to 2.25 on Friday, rather than the 0.75 indicated by the delta as EDZ9 fell 5 bps.    

The powers that be keep trying to fight deflation with unconventional tools while making sure asset prices won’t go down.  But lower rates and QE keep zombie companies on life support and don’t allow the market to effectively clear, thus stifling pricing power and spurring investment flows into financial assets with dubious prospects of returns (Lyft).  But now wage increases are increasingly a headwind on corporate profitability.    

Posted on March 31, 2019 at 1:28 pm by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

Inflation expectations

March 29, 2019

–In one of his recent speeches, Powell highlighted the importance of inflation expectations in terms of policy.  From a Bloomberg article dated March 15: “Testifying before Congress on Feb 26, Powell called inflation expectations ‘the most important driver of actual inflation.’ ”  If that’s the case, then the U of Mich inflation expectations data out later today is quite important.  The attached chart shows a complete round trip for 1-year expectations, from +2.4% in late 2017, to +3.0% in mid-2018, back to 2.4% last month.  We will also be getting PCE Core yoy prices, expected 1.9%, and New Home Sales at 620k units.  Given that shelter is (I believe) about 33% of PCE prices, continued weakness in housing has an impact on this data. 


–Yields rose yesterday as stocks are set to close out the quarter on a high note.  The curve flattened as fives rose 2.8 bps, tens +1.6 to 2.388% with bonds falling nearly 1 bp.  In eurodollars, reds were weakest, dropping 4.5 bps with greens -4.375.  Flows were dominated by put buying.  According to prelim volume figures, EDZ9 put volume was a whopping 5.36 million contracts!  The EDZ9 9750/9737/9725/9712 put condor has at least 400k long outstanding (settled 4.0).  There were other variations on the theme as well, including a buy of 50k 9737/9725/9712 put flies for 1.5, and 9762/9750/9737 put flies for 1.5.  Closer up, about 25k EDN9 9737/9725 put spreads were bought for 0.75.  Almost everything noted here is based on an idle Fed through the end of the year, i.e. no rate cuts.  However, January 2020 Fed Funds are still at 9789, fully 29 bps lower in yield than the current Fed Effective rate of 2.40%.  So that’s the drama.  All near eurodollar calendar spreads are inverted, indicating expectations of ease.  Fed funds say the same thing, with at LEAST one ease priced into the end of the year.  But put buyers are fading that idea.

–It’s worth noting that not only are stocks ending the quarter with strong gains (SPX +12.3% ytd), but WTI crude is also up about 28% on the quarter, with the May contract  CLK9 nearing $60 this morning.  The Shanghai Comp surged over 3% today, bringing the gain over Q1 to a sizzling 24%.   


Posted on March 29, 2019 at 5:00 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

Heavy short end option flow

March 28, 2019

–A lot of attention has been given to the EDZ9 9750/9737/9725/9712 put condor which was bought yesterday in size of 200k from 3.5 to 4.0.  Settled 4.0 vs 9764.0.  Breakevens 9746.0 and 9716.5 (from settlement).  Max gain at expiry of 8.5 occurs between the middle two strikes.  If the Fed doesn’t ease this year, the trade will perform.  Even on one ease and a libor/ois surge, the trade could make money.  I think it’s also worth noting a tremendous amount of upside plays occurred yesterday, notably in red Dec midcurves, 0EZ0.  Example, a new buyer of 67k 0EZ 9862/9887 c spds, which settled 3.0 vs 9798.0 in EDZ0.  A new buyer as well of 50k 9850/9900/9912/9962 c condors which settled 4.75.  There was selling (over 20k) in 0EZ 9737c which settled 12.25.  0EZ midcurve calls added 367k in open interest yesterday.  The point is, there is 2-way trade, but even separate option flows tend to reinforce the theme of calendar spread inversion.

–EDZ9/EDZ0 did not settle at a new low, though it’s close to it at -34.0.  The nadir of one-year calendars is EDM9/EDM0 which settled -42.0 bps, down 2.5 on the day.  The idea of rate cuts is gathering steam.  In Fed funds, I look at the May/July spread in an attempt to isolate odds of a cut at the June FOMC meeting, and August/Oct to isolate odds for the Sept FOMC.  The former settled -6.0 (about 25% odds of a cut at that meeting), and Aug/Oct settled at a new low of -10.0, indicating a 40% chance of a cut at that meeting. New high settle in FFF0 at 9791 indicates more than one ease this year.

–There was a report yesterday on CNBC of a “confidential” ESRB document that cited Brexit, Italy’s banking system, and trade tensions as risks to financial stability in the EU.  Duh.  Might as well throw in the yellow vest movement.   EUR currently 1.1250 nearing the year’s low of 1.1178. A new round of USD strength may yet create problems in EM.  In any case, the bund yield is sinking into the quicksand of negative rates as shown in the lower chart,  though it should find support around -10.  Top chart is of US ten year.  

–7 year auction today.  A few Fed speakers, the most important of which is likely Clarida on a panel discussion.

Global Shocks and the U.S. Economy

At the Banque de France and European Money and Finance Forum Colloquium, Paris, France

Posted on March 28, 2019 at 5:18 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

WE NEED RATE CUTS! (at least that’s the message from the markets)

March 26, 2019

–Rate futures and vol exploded Monday, with the red euro$ pack (2nd year forward) up another 11.25 bps, leading the surge.  The ten year yield fell 4 bps to 2.414%.  All near euro$ calendars made new lows, with front EDM9/EDU9 three month spread at -12.0.  The lowest one-year calendar is the front EDM9/EDM0, which plunged 7.5 to settle at -41.5, and traded as low as -45, nearly projecting two eases.  TYM atm straddle went from 1’28 to 1’38.  On Friday 0EM 9775 atm straddle settled 24.5 and yesterday the atm 9787^ settled 28.5.  The peak euro$ contract is EDH21, two years forward, at a price of 9798.5, just over 2%, and that’s with current 3-month libor at 2.60ish.  January 2020 fed funds settled 9789.0, a rate that’s 28 bps lower than the current Fed effective.  This contract is now projecting more than one ease this year.  The question is WHY?   Clearly the market was leaning off-sides.  The price action is similar to the early January panic spike higher, but it has become broader based and more aggressive.  Recall that the most negative one-year ED spread in Jan was -29 and the ten year yield held just above 2.50%.  Now -41.5 and 2.414%.  The interest rate markets are projecting deep economic malaise which has somehow escaped the notice of the stock market. 

–On a technical basis, the 50% retracement level in tens, from the 2016 low yield of 1.36% to the 2018 high of 3.24% is 2.30% which equates to TYM around 125-07/08.

–Interesting note on WeWork yesterday which released revenues.  The company’s model is to lease office space, provide shared services like beer, and re-lease the space on shorter terms.  Classic borrow short and lend long.  According to an article on ZH, revenue surged to $1.8 billion with an associated loss of $1.9 billion.  That’s a lot of beer.  Softbank is providing the largesse, subsidizing tenants with hugely negative cash flows.

–2yr auction today.

Posted on March 26, 2019 at 5:12 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

It’s over

March 25, 2019

–On Friday all near ED calendars made new lows as stocks sold off.  The first eight 3-month calendars are inverted with the lowest being EDZ9/EDH0 at -13.0.  The lowest one-year spread is now the front EDM9/EDM0 which settled -34.0.  These spreads, along with January 2020 Fed Funds at 9780 (20 bps below the current Fed Effective average), indicate that an ease is coming this year.  There was also an inversion in the 3-month t-bill to 10-year treasury note, which many take as a signal of an upcoming recession.  However, Mohamed El-Erian cautions against making that conclusion in a Bloomberg opinion piece this morning, saying that a solid labor market and rising wages should underpin consumption.  While 2/10 made a new recent low at 12.6 bps, it remains in positive territory, and reds/golds on the dollar curve made a new high near 19 bps (+4.25 on the day).  Ten year yield ended the floor session at 2.453%, down 8.4 bps.  The strongest contract on the dollar curve was EDM20, the first red, which settled +14 at 9777.  Just like the old days.

–Over the weekend the Mueller report found no Russian collusion and deferred on obstruction.  It’s over.   I thought stocks would cheer the outcome given the removal of uncertainty, but US stock index futures are lower this morning.  Falling bond yields globally are not being welcomed as a stimulative elixir, but a sign that growth (and corporate profits) are going to be much harder to some by.  

–On March 1, EDU21 settled at 9749.5.  Since then the atm straddle has moved three strikes, with the contract closing Friday at 9787.0, up 37.5 bps in a month.  On March 1, 2EU 9750 straddle settled 37.0 (Green midcurve, expires 13-Sept, 2019).  On Friday, 2EU 9787 straddle settled 34.5.  Not drawing much of a conclusion, but I’d be much more inclined to be a straddle seller from these levels.  

Posted on March 25, 2019 at 4:56 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

Dislocations

Weekly note – March 24, 2019

In last week’s pre-FOMC note I said the dots would likely be irrelevant.  That was wrong.  I thought the Fed would trim one hike from the 2019 forecast, and instead, they cut two, now indicating no hikes in 2019.  Apparently, the market was leaning my way, because the strongest contracts on the Eurodollar strip, EDM20 and EDU20, rallied almost exactly one-quarter percent, the size of one (additional) Fed projection.  Both contracts closed up 22 bps on the week.  Net changes on the week: Whites +11 (with EDH0 +18.5), Reds +21.75, Greens +19.75, Blues +17.875, Golds +17.25.  On the treasury curve, fives led the surge, falling 14.1 bps.  January 2020 Fed Fund contract settled 97.80, a new high, indicating around 80% odds of a cut in 2019.

Much was made this past week of inversion of the 3 month t-bill and ten year treasury yield, and its recessionary implications.  Many Eurodollar calendar spreads have long been inverted, and had posted their lowest levels at the beginning of January, following December’s rate hike and stock market swoon.  At that time, the most inverted one-year spread was EDM19/EDM20 with a low settlement of -28.0, just about the size of one Fed move.  On Friday, it was again EDM19/M20 which made the lowest low, this time at -34.0.  Last week, I mentioned that the lowest the 3rd to 7th one-year constant maturity spread reached in 2006 was negative 47.5 bps (in December of that year).  Recall that in 2006, the FF target was 5.25%, the peak of the last tightening cycle which had ended in June 2006.  There was a lot of room to cut, but the first ease didn’t occur until September 2007. 

On the Eurodollar curve, the peak contracts are EDH21 and EDM21, which both settled 9787.5, or 2.125%.  The ten year treasury ended Friday’s floor session at 2.453%. right around the same level as 3- and 12-month t-bills.  The thirty year bond ended the week at 2.89%.  Everything from EDM21 back steepened to new recent highs.  Graphically, the chart below is informative.   It shows the 2/10 treasury spread vs red/gold euro$ pack spread.  These had tracked very closely, but since December, a spread has opened up.

The 2/10 treasury spread is near its lowest level at 12.6 bps, while red/gold rallied this week and closed just above 18.5 bps.  The two year is similar to 8 quarterly contracts.  The reds, one year forward, are projecting nearly 2 eases, but the front contracts are held down in a relative sense as it’s hard to pinpoint the first actual ease, making it a bit more difficult for 2’s to rally.

While I’m on the topic of recent ‘dislocations’ the next chart is also of some interest.  It’s the Nasdaq vs small-cap Russell.  As can be seen, in March these two pretty much went in opposite directions. 

One client observed it’s classic late cycle behavior, a reach for safety in the big caps.  I would mention that I think small caps are more dependent on actual economic growth prospects.  In any case, it’s worth noting that some stock indices, like Russell, DJ Transports, XLF (financials ETF) and the KBW banking index failed taking out highs of the beginning of March and now have fallen below the low made in the early part of the month.  Some sectors are trading a lot like a bear market. 

In terms of global synchronization, the chart below features ten year yields from the US, Canada, UK, and Germany, with Japan’s 30 year (as tens are pegged by the BOJ).  All at new lows in well over a year, with sharp drops since October. 

In terms of monetary policy, I’ll quote Charlie McElligott of Nomura, with his succinct description of QE and ZIRP shortcomings:

1) Low interest rates are (ultimately) deflationary, sustaining zombie firms in a “liquidity trap” which weigh on overall economic performance while also weakening investment.
2) Low interest rates and QE are deflationary as you incentivize mal-investment and blow perpetual speculative-asset bubbles, which (ultimately) correct and drive deleveraging – thus the ‘balance sheet recession.’
3) As there is still a lot of debt related “scar tissue,” you can’t push credit on a string.  This then leads to quick “muscle memory” returns to a defensive posture: “If there is no return on capital, capital should not be deployed.”


The Fed is obviously concerned about the shape of the curve and deflationary impulses.  Powell has referenced the idea of letting inflation over shoot to catch up with past shortfalls.  Now Trump has nominated Stephen Moore to the Fed board, who, according to a recent NY Times article, said the Fed should “reverse its disastrous hikes” of September and December.  “He recently pushed the Fed to target commodity prices in setting interest rates, a view rarely advocated by economists and monetary policymakers.”  Here’s a guy who wants to buy reds and sell everything behind.

We’re going into a week without a lot of hard economic data, with auctions of $40b 2’s on Tuesday, $41b 5’s Wednesday and $32b 7’s Thursday.  Core yoy PCE prices on Friday expected 1.8 from 1.9.  However, we have the added twists of the Mueller report and May’s Cabinet mutiny that could both provide a marginal flight to safety.  Will Trump respond to Mueller with a diversionary tactic of highlighting China progress and imminent deal?  Or will those negotiations become more difficult with Trump holding a weaker hand?  There are also a lot of Fed speakers on tap who might now feel compelled to talk up the economy as last week’s FOMC caused many to question whether the Fed knows that something ominous is around the corner.

3/15/2019  3/22/2019  
UST 2Y 244.0 232.7 -11.3
UST 5Y 239.5 225.4 -14.1
UST 10Y 258.9 245.3 -13.6
UST 30Y 301.5 288.9 -12.6
GERM 2Y -54.1 -56.5 -2.4
GERM 10Y 8.4 -1.6 -10.0
JPN 30Y 57.5 52.2 -5.3
EURO$ Z9/Z0 -21.0 -29.0 -8.0
EURO$ Z0/Z1 -3.5 -1.0 2.5
EUR 113.26 113.05 -0.21
CRUDE (1st cont) 58.82 59.04 0.22
SPX 2822.48 2800.71 -21.77
VIX 12.88 16.48 3.60
Posted on March 24, 2019 at 1:01 pm by alexmanzara · Permalink · 2 Comments
In: Eurodollar Options

Bund yield sub-zero first time since 2016

March 22, 2019


–EDZ9/EDZ0 posted a new low settlement of -26.0 yesterday, with front Dec pressured in part by option trades (buyer of 40k EDZ9 9750/9737/9725/9712 put condor for 5.25).  Also of note is that the Fed Effective rate ticked up to 2.41%, 1 bp above the interest on excess reserves, causing sales in front FF contracts.  Net changes on the day in rate futures were negligible, although there was a slight flattening bias in the curve, with 5/30 pulling back from Wednesday’s new high of 64 to 62 yesterday.  Ten year yield was unch’d at 2.537% even as stocks exploded higher.  

–Forward euribor calendars are also making new lows, for example ERZ0/ERZ1 was +19.5 late as compared to EDZ0/Z1 at -3.5.  The bund was at a yield of 4.1 bps yesterday and has sunk below zero today as the German PMI Mfg index fell to 44.7. its third decline in a row.  Every time the Fed tries to depreciate USD, the Germans respond!  Of course, yoy changes in S Korean Exports and Taiwan export orders near -10% continue to reflect gloom in global trade.  In the US, PMI Composite today expected 55.2 from  55.5 with Mfg at 53.6.  Existing Home Sales expected +2.2%.

–With a Fed effective of 2.41% the ten year yield is just 1/8% above that level.  Even with the Fed’s capitulation this week, they haven’t been able to restore the lubricant of positive carry with 2’s and 5’s both sub-2.4%. Stocks seeing a slight pullback this morning following yesterday;s strength, with small-cap Russell the notable underperformer.  

Posted on March 22, 2019 at 5:16 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

The Fed Folds

March 21, 2019

–The Fed effective rate is 2.40%.  As of floor close yesterday, both 2’s and 5’s were lower at 2.398 and 2.334.  Three month libor is around 2.60.  The ten year yield as of floor close was 2.537.  The first nine 3-month euro$ calendar spreads settled negative (inverted) [thanks DK].  EDZ9/EDZ0 is still the most inverted one-yr eurodollar calendar at a new low settle of -25.5, although it’s now tied with EDU9/EDU0, which plunged 8 bps to also settle -25.5.  Previous low settle in EDZ9/Z0 was -22.0 which was near the height of stock market worries on Jan 3.  On that date, TYM9 had settled 123-135; yesterday TYM9 settled 123-13.  Even though stocks have rebounded in Q1 as have inflation expectations, the Fed went all in on stimulus, removing the prospect of rate hikes and ending balance sheet reduction in Q3.  Ten year note to tip closed at a new recent high 197.6 bps, again nearing 2%.

–When big trades used to hit the floor, the local community’s common refrain was “That guy knows something [that we don’t]”  Does the Fed know that something ominous is around the corner?  The ‘real’ rate as displayed by the ten year inflation-indexed note fell 9 bps to 0.56%.  Last year it had surpassed 1%.  Last year Brainard said in a speech that the neutral rate WAS GOING UP as the Fed raised rates.  Now I guess it’s going down.

–Here’s Powell  from last October, saying the economy’s great and everything is rosy. https://www.reuters.com/article/us-usa-fed-powell/powell-u-s-outlook-remarkably-positive-with-low-unemployment-tame-inflation-idUSKCN1MC2A7
Then Q4 hit and the Fed’s psychology has flipped.  Doesn’t really instill much confidence. If things are good, why is the Fed once again trying to drive the investment community into risky assets?  What if that plan backfires?

–Gold is up $16 this morning at $1318/oz and Palladium’s at another new high with the June contract around $1570.  5/30 ended at the highest level since 2017 at 64 bps.  Red/gold ED pack spread also notched a new high at 15.625, up 2.5 on the day.  The Fed has implicitly communicated a plan to let inflation “run hot” which should encourage the steepening trend at the long end.   Although USM closed decisively over 146-16 resistance with the 30y under 3% yield at 2.974%, a further drop in yield should lag the rest of the curve.  The Fed announced maturing MBS will be invested in treasuries.  The Fed doesn’t hedge MBS.  The private market does.  At the margin, there should be more volatility at the longer end.  

–News today includes Philly Fed expected 4.8 from -4.1.  Jobless Claims 225k.  Leading Index +0.1%

–In yesterday’s note, I said I thought Powell and the Fed would lean against renewed strength in the stock market and strike a more hawkish tone. As Ron White would say. “I was wrong”




Posted on March 21, 2019 at 5:06 am by alexmanzara · Permalink · 2 Comments
In: Eurodollar Options

Odds and ends

March 20, 2019

–FOMC day.  Dots and balance sheet plans will be scrutinized, with an expected announcement of a schedule to end balance sheet run-off.  A decision regarding the maturity of the Fed’s holdings is likely further down the line.  The Fed has consistently warned of risks relating to a global slowdown, which was on display with the earnings release by Fed Ex, which fell 4.6% after hours.  The company cited, in part, slow global trade.  As an aside, Dow Jones Transports had an outside day and closed lower.  Unlike other indices, the rally in DJT through February failed to reach December’s high, and this last move up failed to reach February’s high. 

–Yesterday’s action in rates was quiet, with net changes pretty much within 1 bp of the previous close.  It’s somewhat interesting that the last two red midcurve straddles settled identical to the last two greens; 0EZ and 0EH 9762 straddles settled 40 and 47, as did 2EZ and 2EH 9762 straddles.  Nominally green premium has been the highest, so current levels might indicate a flatter curve over the short term.  Also worth a mention is that 0EU 9762^ on EDU20 is a half basis point higher than 3EU 9762^, 31.5 vs 31.0.  My inclination would be to buy blue/ sell red (THIS IS NOT A RECOMMENDATION).  The long bond contract (USM9) may provide a decent indication of how the market perceives the Fed and the economy going forward.  There is heavy resistance in the contract at 146-16, just under 3% in terms of yield.  A few closes above that level would signal slowing inflation and growth.  

–Quick note on CME stock.  The CME this month announced plans to charge a fee on collateral holdings, for example, when t-bills are deposited for margins.  Seems as if the exchange is trying to squeeze revenue wherever it can as open interest levels have stagnated.  Total exchange open interest one year ago to yesterday is down around 6% as the Fed has helped stifle activity.  

–One last note concerns the article below and student loans.  The White House is proposing a cap on student borrowing. Key passage:  “Underpinning that idea is a belief that colleges are largely responsible for the nation’s debt woes. The WH says easy access to federal aid has led colleges to drive up prices. adding that they are ‘unable or unwilling’ to make education more affordable.”    

https://www.msn.com/en-us/news/politics/white-house-proposes-caps-on-student-loan-borrowing/ar-BBUVLv1?li=BBnb7Kz&ocid=mailsignout

Posted on March 20, 2019 at 5:14 am by alexmanzara · Permalink · 3 Comments
In: Eurodollar Options