The Trump Whisperer
April 23, 2025
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–Is Bessent getting Trump to modify his most strident pronouncements? All of a sudden some softening on removing Powell and on China tariffs, leading to an unwind of Monday’s price action. The curve flattened, stocks jumped, gold reversed.
–In rates, the 2yr note rose 5 bps to 3.802% (old 2y) and the 30y fell 4 bps to 4.874%. On the SOFR strip, reds were -7.25 to 9681.125, greens -2.375 to 9658.375, blues -0.25 to 9633 and golds +1.125 to 9608.625. ESM5 settled +130 to 5314 and up another 109 this morning to 5423. GCM5 which had rallied $500/oz since April 9, from below 3000 to 3500, is now seeing profit-taking, printing 3340 this morning.
–Exit seller of 60k SFRM5 9575/9600cs at 9.5 to 9.25. Settled 9.25 ref M5 at 9590.5. Exit trade, giving up on a Powell ease.
–I’ve seen several articles like this one on BBG today: ‘Yale signals private equity may have peaked’. The music has stopped and now endowments need to unload private equity and credit. To who?
–Today’s news includes S&P PMIs and Beige Book, along with 5y auction. I believe the Chicago Fed is preparing this issue of the Beige Book. This release could have added significance in case the anecdotal evidence cites softening of conditions.
Similarities 2007 and now
April 22, 2025
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–On April 14, it was announced that RJ O’Brien would be acquired by StoneX (SNEX). It’s not the first time RJO was sold.
In 2007, Spectrum Equity Investors and Technology Crossover Ventures bought a majority stake in RJ O’Brien & Associates. I found an old article which notes the deal from May 28, 2007
A press release from Dec 13, 2010 (prnewswire.com) reported that the family bought back majority control in late 2010, about 3.5 years later.
In mid-2007 the FF target was 5.25%. Within 1.5 years, by the end of 2008, the target was zero. Clearing firms make a lot of money on positive carry of client funds, and the fall in interest revenue was a factor in the diminished the value of the company. Last week StoneX announced the acquisition. The current midpoint of the FF target range is 4.375%; the high was 5.375% just prior to the first ease in September of last year. It’s also worth mentioning where CPI was during these periods.
In 2006, the high CPI print was 4.5%. But by October 2006 it was down to 1.3%, when it again began to climb. Similar to recent action. By mid-2007, CPI was 2.4 to 2.5%, but in October it printed 2%. The first Fed cut of the GFC was in September 2008 (just as the first ease of this cycle was Sept). As the Fed was easing, CPI shot higher. By July 2008 it printed a high of 5.6%.
Those among us who think the Fed CAN’T EASE because of high inflation prints would do well to recall this period.
–Wild steepening yesterday, with 2/10 up 12.5 bps to 65.9 and 5/30 up 8 bps to 95.0. I’ve included a chart of 5/30. On the SOFR strip the red pack (2nd year forward) was +7.0 to an avg price of 9688.375 while golds (5th yr forward) were -7.625 to avg price of 9607.5. Even deferred 3 month calendar spreads are at surprising levels. For example, SFRM9 settled 9617.5 and the next contract, U9, settled 9610.5. A spread of 7 that far forward is elevated. I am NOT suggesting it’s a sale, just noting that the steepener trade is a bulldozer. As every headline blares, gold is also making new highs with a sizzling gain ytd of ~ 30%. The new world order will likely embrace monetization of gov’t debts. Gold and the curve reflect that.
–TSLA reports today. 2y auction. Philly Fed Services (-32.5 last).
–Here’s an article that helps explain the difference between average and median:
From the comments: ‘The average American is a millionaire. The median American is holding up a “please help” sign at a stoplight’.
Easter Monday
April 21, 2025
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–News this morning: Pope Francis has died. Gold is making new all-time highs as the dollar slides to a new low. DXY current 98.10 (low in Jan 2021 89.21). Curve is making new recent highs with 2/10 now 59.5 (I marked at 53.3 on Thursday’s futures settle; high in Jan 2021 was 158), and 5/30 now 93 (marked at 87.1 on Thusday; high in Feb 2021 was 163). GCM5 now above 3400, last at 3405, up ~ $77/oz.
–Thursday featured a sharp steepener with the 2y +3.2 bps to 3.935%, and 30’s up 6.1 bps to 4.806%. Current 30y 4.846%, so up 4 bps. This morning’s price action being attributed to Trump’s attacks on Powell. Equities slipping with ESM5 5257.00, -56.75. I saw a fair amount of commentary over the weekend suggesting stocks are unlikely to test recent lows. Perhaps a bit too complacent.
–Interesting link:
https://www.visualcapitalist.com/americas-19-trillion-consumer-economy-in-one-chart/
The Devil’s Triangle
April 19, 2025 – Weekly Comment
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On Sept 1, 2000 SPX closed 1521, testing the all-time-high earlier in the year of 1527 in March. Fed Funds were 6.5%. By April 3, SPX had declined 27% to 1107. Nasdaq fared much worse: from Sept 1, 2000 to April 3, 2001, it was crushed …down 66%. Starting at the turn of the year, the Fed aggressively cut in a series of 50 bps, right in the beginning of Jan ‘01, then Jan 30 and March 19. (At the time of the first cut, Nasdaq 100 had already dropped over 50% from the March 2000 peak, but SPX was down less than 20%). Fed funds were now 5%. I was on the trading floor working for Refco, and there were no rules against trading your own account. I was long a bunch of April calls on the June’01 contract, which expired worthless on April 12. Easter was April 15. I had thought the Fed would ease again, as Nasdaq was imploding, but I got the timing wrong. The bulk of my position had expired worthless, but I had a few calls further out on the curve as well.
The next week I was on the phone with Mike Spencer, an upstairs broker in NY. He was buying clips of the September contract, a couple of hundred at a time. It was a slow morning, and he said, “Sorry to keep the line open, I’m not sure if this guy is done yet.” I said, “No problem, I’m here as long as you like. We’re not busy.” The next thing Spence said, in a completely normal but slightly surprised voice is, “The Fed just cut.” Click, line was dead. I flashed an order into the June contract to buy 20 lots. It was very quiet and Julie, one of Donny Lanphere’s clerks, just gave me a bored look and started to turn into the pit. At the top of my lungs I screamed “BUY ‘EM”. I was probably 35 to 40 feet away from the pit as the Refco booth was at the top tier; I think there were three or four levels descending to the pit level. One or two seconds elapsed from the time Spence said ‘cut’ to my yell. But in the next second the floor absolutely erupted. If you’ve ever been on a trading floor when nothing is going on, and the phone rings, it’s kind of loud. Within seconds every light on our phone pads were blinking like a Christmas tree, but the sound of the rings was overwhelmed by the roar of the pits. The floor was physically shaking. Think of the biggest play in the biggest sporting event you’ve ever attended and that’s the volume. I think the June contract was instantly up 30 or 40 bps, and even though I was on two phones and buried, I remember thinking, this is either going to be a very good day or a disaster. I had entered my order at the market. If I was filled +30, there was no recourse. I wasn’t. When the cards (fills) came back to the desk over the next hour or so, my price was exactly where we had been.
When you tell a story, have a POINT, right? In the grand scheme of things the above tale is small potatoes. I didn’t have a lot of money in my account where I could have done 100 contracts. However, it was the only time I was ever first. I didn’t know if the news I heard was true in that split second but there was no hesitation. Just reflex. The second reason I mention it is because the time of year is the same, and I believe underlying conditions are similar. Emergency ease? No. But I maintain that odds of ease in the near term are much higher than the market is pricing.
When Trump fires Powell, I am going to hit a bond bid. But I am not going to be first. And I am confident bonds will be crushed. So, this now all takes a bit of strategizing. Safe to buy bond puts before the fact? Even though vols sharply compressed this week premium is still expensive. What if it doesn’t happen? What if it does and stocks crash too, sparking a bond reversal? Probably need to scale in delta hedges. How likely is it that Powell is actually removed? The May FOMC is two and a half weeks away. If there’s no ease, Trump will be apoplectic. If there is a cut, bonds will still sell off, at least temporarily.
I’ve been expecting an ease at the May FOMC. But now that Trump has publicly ratcheted up pressure on Powell, I don’t think it will occur, even though financial conditions have tightened rapidly. Economic uncertainty is obviously increasing. The inflationary impact of tariffs is going to be meaningless if the economy tanks.
When I was in college, I took a class about Keynes’ theories from Robert Eisner, a famous economist. I don’t remember a lot from my studies, but a couple of things from that class stuck with me. Here’s what (I think) I learned: Inventories don’t necessarily equal intended inventories. That’s it. At the time, classical economists would argue that excess production/unsold inventories would lead to price cuts, employment would fall, but interest rates would fall as well, to a level that would encourage new activity. It was all a self-correcting mechanism. Keynes identified a possible problem: a liquidity trap, where lower rates wouldn’t generate new activity. Keynes realized there could be a self-perpetuating negative feedback loop. This was where a temporary increase in gov’t spending came in, to stop the doom loop. Now we hear ‘Keynes’ and the negative connotation is simply that more gov’t spending fixes everything. That wasn’t the original thought.
The next idea is, I believe, attributed to Milton Friedman: When considering an economic decline, first, the problem needs to be identified. Then, plans to address the shortfall need to be considered. Then policies are implemented. Each step necessarily entails lags. By the time action is taken, the original issue has likely run its course, and the policies now create new problems. A non-discretionary model is therefore the best solution.
Another concept that is, perhaps, most applicable to today is John Mauldin’s ‘fingers of sand’ paper. A scientist computer-simulated sand hills, randomly dropping one grain of sand at a time on different parts of the pile. He found that internal ‘fingers of instability’ would become buried in the pile, but there was no way to model which grain of sand would ultimately cause the collapse. The only clear thing was, the bigger the sandpile, the more likely one of the fingers would buckle, causing destruction. And, there are always unstable fault lines under the surface.
I had seen Charlie Rose interview Lloyd Blankfein, where the latter said Goldman’s real strength is risk management: Considering the probability of many scenarios before the fact, identifying which was most likely, and therefore being ready when one or another started to play out.
To tie this up: First, I still think we’re close to the last grains of sand which could create severe instability. It’s hard to get the timing right, as my worthless calls story at the top of the page attests, but it’s essential to game the possibilities. Second, in terms of unintended inventories, one might now say that’s impossible given instant knowledge of demand, supply chains, etc. How can physical inventories get out of hand in the aggregate? But that’s not where we are anymore. In my opinion, inventories are huge projects costing billions of dollars. Intellectual capital. The uncertainty regarding tariffs, the downward trend in global trade, the pullback (at the margin) of gov’t support…all of these things figure into the ‘inventories’ equation (for me, anyway). I THINK I know that fiscal support is eroding. I think the Fed will ease more aggressively to try to mitigate the uncertainty. But Powell now seems to be leaning more toward Friedman. ‘We’ll ease further when the model (hard date) tells us. We’re not going to be super-discretionary and take our cues from the plunging anecdotal data like the Philly Fed and confidence surveys. The two variables of unemployment and inflation haven’t come together for us yet.’ It always used to be that the Fed said we’ll adjust policy proactively, otherwise we’ll be behind the curve. That has always been the Fed’s defense AGAINST a rules-based policy. I believe Powell is leaning towards rules now as a shield against Trump’s attacks.
There’s one other famous economist (apart from Trump) that I’ll mention: Recep Tayyip Erdogan. He had thought it was a good idea to replace his central banker with his son-in-law. Or maybe that was the finance minister. Barely matters. He’s changed the central bank chief several times. From 2020: Erdogan has called for rate cuts, refuting established economic theory that high rates can rein in inflation. Last weekend he described interest and exchange rates and inflation as the “devil’s triangle”. The lira continues to spiral down the nine layers of hell.
The Devil’s Triangle. I love that. It’s a LOT better than the Mundell-Fleming Trilemma (or impossible trinity). “Look, it’s the DEVIL. We’ve got to try some new stuff.”
Beige Book Wednesday. Twos, fives and sevens auctioned starting Tuesday.
Q1 GDP advance on April 30. Payrolls May 2. FOMC May 7.
| 4/11/2025 | 4/17/2025 | chg | ||
| UST 2Y | 395.0 | 379.4 | -15.6 | wi 377.7 |
| UST 5Y | 416.0 | 393.5 | -22.5 | wi 393.8 |
| UST 10Y | 448.0 | 432.7 | -15.3 | |
| UST 30Y | 487.0 | 480.6 | -6.4 | |
| GERM 2Y | 178.9 | 168.6 | -10.3 | |
| GERM 10Y | 257.0 | 247.2 | -9.8 | |
| JPN 20Y | 232.8 | 223.6 | -9.2 | |
| CHINA 10Y | 166.4 | 165.4 | -1.0 | |
| SOFR M5/M6 | -64.5 | -90.5 | -26.0 | |
| SOFR M6/M7 | 13.5 | 10.5 | -3.0 | |
| SOFR M7/M8 | 23.5 | 25.0 | 1.5 | |
| EUR | 113.55 | 113.85 | 0.30 | |
| CRUDE (CLM5) | 60.90 | 64.01 | 3.11 | |
| SPX | 5363.36 | 5282.70 | -80.66 | -1.5% |
| VIX | 37.56 | 29.65 | -7.91 | |
| MOVE | 137.26 | 114.64 | -22.62 | |
Stretching it out
April 17, 2025
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–Not now…later. That’s the markets interpretation of Fed policy, and it didn’t change after Powell’s comments yesterday. For example, SFRM5/SFRM6 one-year calendar settled down 6.5 bps at a new low close of -87.5 (M5 9592.5, unch’d and M6 9680.0, +6.5). Just over three months ago on Jan 13 it settled nearly positive at -1.5. In another example, FFN5 settled 9588.0 down 1 on the day. But FFX5 settled 9641.5, +2.5. Current EFFR is 4.33 or 9567. FFN5 encompasses both the May and June FOMCs, but there’s not even one full 25 bp ease being priced. That’s just stupid. November, FFX5, is a ‘clean’ month with no meetings. The July 30, Sept 17 and Oct 29 FOMC meetings precede the contract and it’s 9641.5 or 3.585%, just 74.5 bps below the current EFFR. Anyway, the eases are being gently pushed forward in time.
–Stocks, which were already lower on the day, reacted negatively to Powell. SPX down 2.4% and Nasdaq Comp down a bit over 3%.
–A quote from MNI:
Powell says “I do think we’ll be moving away from” the dual mandate goals “probably for the balance of this year. Or at least not making any progress, and then we’ll resume that progress as we can.” He repeats that “the tariffs are larger than than forecasters had expected, certainly larger than we expected, even in our upside case.”
–Of course, a BBG headline this morning blares: Trump says Powell’s termination ‘Cannot Come Fast Enough’. In my opinion, an ease is, or will shortly be, justified. The market thinks so as well. But Trump is likely pushing it even farther out.
–From new NY Fed Business Leaders Survey
(responses collected between April 2 and 9)
“The business climate index dropped nine points to -60.7, its lowest level in more than four years, suggesting the business climate was considerably worse than normal.”
–Just an update on Corn priced in gold. If the world used REAL money we’re in severe deflation.
https://www.newyorkfed.org/survey/business_leaders/bls_overview
It’s a bull market in moral hazard (gold)
April 16, 2025
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–I was away from work for the past week, near Mount Hood, Oregon for a wedding. Also visited N. California and Eugene and Portland, OR. Beautiful country, but in Eugene, Oregon and in Portland, the drug and homeless problem is overt. I would say that what struck me at the wedding festivities that I hadn’t really noticed previously, is that several of the younger people talked about job cuts and were concerned about their own continued employment. It’s like the Ronald Reagan quote: “Recession is when your neighbor loses his job. Depression is when you lose yours. And recovery is when Jimmy Carter loses his.” In any case, I believe we’re in recession now. I don’t care what the big banks are saying about recession odds. Look around.
–During the few days I was gone, ranges were absolutely staggering. For example, from April 7 high prints to April 14 lows, SFRM6 = 75 bps 9726 to 9651. SFRZ6 also 75 bps, 9726.5 to 9651.5. SFRZ7 9705.5 to 9627.0 or 78.5 bps. When the Fed is ‘in play’ typically the 4th, 5th and 6th quarterlies are most volatile on the SOFR strip. But there were obviously large ranges further back as well (SFRM6 is 5th slot). Yesterday I marked 10s at a yield of 4.321%, right on top of the current 4.33% Fed Effective rate and SOFR setting from April 14 (also 4.33%).
–I loosely watch FV to US DV01 spread vs the vol spread. Currently futures DV01 are 43.30 (per $100k contract) and 127.50 or a ratio of 2.94. The vols for June, 5.31 in FV and 14.64 for US, ratio of 2.75. Typically the vol ratio is much lower relative to DV01 ratio (more like 0.80 vs 0.94 now) which intuitively makes sense; the 5y area is more volatile and sensitive to Fed moves. Currently it feels like US vol is too high on a relative basis, but that makes some sense as well, as the market is worried about inflation and concerned the Treasury might run into some difficulties placing long-term debt.
–None of this discussion is intended to be a specific trade recommendation, but when I marked settles in SOFR midcurves, I saw that nominal straddle levels of reds are higher than that of greens and blues. No big deal, it’s usually that way. However, I’m not sure if it SHOULD be that way in the current environment. As an example, 0QZ5 9675^ settled 84.0 ref Z6 9675.0s. 2QZ5 9650^ settled 77.5 ref Z7 9651.0s. Again, no specific trade, but given that US vol seems high, I would think that nominal levels of green midcurves are a bit too low on a relative basis. As mentioned above, the range was actually a bit larger in SFRZ7 than SFRZ6 last week.
–Powell speaks today on the outlook at the Economics Club of Chicago at 1:30 EST. I can’t help but think some covert liquidity operations/promises occurred recently to steady the markets. Supposedly a treasury basis trade blow-up but open interest in FV and TY down less than 5% from highs to lows in April. It’s a bull market in moral hazard, which necessarily translates to new highs in gold. GCM5 up $82 this morning at a new high 3323.
Dislocations
April 9, 2025
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The bond market is breaking. The collapse of swap spreads is a terrible development. The pressure on the basis trade does not bode well. It shows funding issues, and also indicates that end demand for treasuries is drying up versus supply.
–From ‘Swap Spreads: Should We Be Worried’ by Kevin Muir, The MacroTourist, yesterday.
–ECB Ready to Ensure Financial Stability, Villeroy Says (Reuters this morning)
–News this morning is all about basis trades gone bad and swap spreads imploding. The thirty year yield exploded by over 30 bps in the past two sessions, ending at 4.706% yesterday. (higher overnight). My marks at futures close: 10y yield +9.7 bps at 4.25% while 10y swap was only +3.8 bps to 3.683%, Implied vol is screaming higher. All back SOFR calendars from SFRM6 back made new highs. Net changes in SOFR: Whites (1st yr) +4.125 bps, Reds (2nd) +2.125, Grns -3.875, Blues -6.625, Golds -7.25. Huge steepening. 10y auction today and 30s tomorrow, following a sloppy 3y yesterday.
–At the heart, it’s all about liquidity shutting down. Hedge funds ‘rent’ balance sheet from banks/dealers to enter these trades. If the financing window closes, panic ensues. The Fed WILL step in. If there’s a US treasury buyers strike (as intimated by Japan’s Ishida yesterday) that leaves the Fed as buyer of last resort. Powell is going to have to provide massive liquidity. Which in turn raises inflationary fears. Which in turn steepens the curve. By the way gold up $74/oz to 3064 (GCM5). High tick this month has been 3200. So far. We’ll see what the real definition of money is as April unfolds.
–What’s reflected in futures? First, there are obvious exits, but this is the pre-panic, not the actual panic yet. Open interest changes yesterday: TU +29k, FV -120k, TY -36k, UXY +2k, US -15k, WN -5k. These changes aren’t big enough to suggest massive unwinds. Yet.
–FFK5 traded to 9585.5 overnight, just one bp shy of certainty of a 25 bp ease at the May 7 meeting. Now prints 9578. Time to start thinking about a cut of 50 in conjunction with other programs. The Fed will not have the luxury of waiting for hard economic data.
–From late last month:
A panel of financial experts has urged the Federal Reserve to consider setting up an emergency facility to manage the potential unwinding of highly leveraged hedge fund basis trades – a move aimed at safeguarding the $29tn US Treasuries market from systemic risk, according to a report by Bloomberg.
Yes, the Fed is aware of and has been talking about basis trade risk for some time.
–I always remember the Asian financial crisis in the 1990s. There were articles about which hedge funds were at risk of failure. Someone interviewed Julian Robertson of Tiger. He said, we don’t have any exposure, when I started to see signs of trouble I told our traders to get out of everything related to Asian ccy’s. I didn’t want anything to do with it. The problem here is, you can’t avoid interest rate risk…
I am away the next few days.
Wild price action
April 8, 2025
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–Wild price action Monday. ESM5 had a range of 454 points, around 8%, 5286.5 to 4832. At the low SPX was off a bit over 21% from the February high. Long end of the curve also had a monster outside range day, with USM5 range nearly 5.5 points! 122-05 to 116-24 with a settle at 117-20. The 30yr bond yield at futures settle was up 20 bps to 4.59%. Initially there was a flight-to-safety bid, but that evaporated. Japan’s Prime Minister Ishiba said, “I’ve told the President that Japan has been the biggest investor in the United States for five straight years and the tariff policies could hurt Japanese companies’ investment capabilities.”…which sounds a lot like, “We’re not buying US debt any more.” Of course, the inflation headwinds from tariffs might also be considered bond negative, and US gov’t finances would likely deteriorate in recession. USM5 118 straddle settled 4’60 (46 dte), just under 5 points, a little less than the day’s range. I marked vol 14.8, a new recent high. This level is higher than August yen-carry turmoil (14), but lower than just prior to the US election (17.5). USK vol 16.7 with 18 dte.
–Curve steepened, with 2’s ending up 6.2 bps to 3.73%, 10s up 16.2 bps to 4.153%. Spreads made new highs with 2/10 up 10 bps to 42.3 and 5/30 up nearly 8 bps to 75.5. SOFR calendar spreads from SFRU6 (the peak contract) on back made new highs. SFRU6, which settled 9686.0, -7.5 on the day, had an astonishing range of 9728 (Sunday night high) to 9668 or 60 bps!!
–Don’t see this very often: FFN5 was UP 4.0 bps to 9604.5, while FFN6 was DOWN 5.0 bps to 9689.5. FFN5, front July, has two scheduled FOMC meetings in front of it, May 7 and June 18. Current EFFR is 4.33 and FFN5 yield is 3.955, a difference of 37.5, or 1.5 cuts, assuming quarter point moves. The spread from FFN5 to N6 is -85 bps.
–Consumer credit for February was released late yesterday, and indicates a weak consumer.
In February, consumer credit decreased at a seasonally adjusted annual rate of 0.2 percent. Revolving credit increased at an annual rate of 0.1 percent, while nonrevolving credit decreased at an annual rate of 0.3 percent.
–This morning NFIB Small Business Optimism fell to 97.4 (expected 99) from a high of 105.1 in December. In the 2 year period from mid-2022 to mid-2024 it averaged 91. Three-year auction today followed by 10’s tomorrow. CPI is on Thursday.
A few early levels
April 7, 2025
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A few updated levels show early panic, now subsiding. These prices are from approx 5:00 am EST.
FFK5 high 9601.0 now 9580.0 +4.5 (If the Fed eases on May 7, then FFK5 goes to 9586.5)
FFF6 high 9707.5 now 9685.0 +16.5 (at the high, sub-3% by year end)
SFRM5 high 9657.0 now 9618.5 +12.0 (current EFFR is 4.33 or 9567. At the high there was nearly 100 bp ease priced).
SFRU5 high 9728.0 now 9710.0 +16.5 ( at the highs, all reds were around 2.75%)
TYM5 high 114-10 now 113-205 +19 (long end didn’t rally all that much; deficits could easily worsen)
ESM5 low 4832.00 now 4927.00 -183, down 3.6% (at the low the futures were down about 22% from Feb 19 high. As mentioned on the weekend, the halfway point from 2022 low to this February’s high is 4863. The 2022 high was 4794. Holding so far).
Good luck today.
Taketh Away
April 6, 2025 – Weekly Comment
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We all know what happened.
SPX and Nasdaq 100 made new all-time-highs in mid-February. From Tuesday, pre-Liberation day, to Friday’s close, SPX down 12.2% and NDX down 14.2%. From Feb highs to Friday, SPX -17.4% and NDX -21.5%. Worth noting is that from the high at the start of 2022 (4794) to the low in October (3583), SPX fell 25%. We’re not there yet.
As of Friday’s close, we’ve retraced 42% of the 2022 low to February’s high. Massive increase in perceived wealth followed by a loss in perceived wealth.
Halfway back would be 4863, and the 2022 high was 4794. Should be a support area. Now 5074.
The questions are: what’s an appropriate template going forward for markets and the economy? Is this a sea-change in global trade and standards of living?
In Q4 2018, the Fed was in a hiking/QT regime, and SPX fell 20% in Q4. Though there was an emergency Treasury dept meeting and announcement, the Fed’s final hike was in December (followed by a delayed pivot and ease at end of July 2019). Rates had, of course, anticipated the ease, as twos fell from around 2.75% in mid-Dec 2018 to 1.75% by June 2019. Currently twos have fallen from 4.36% in Feb (pretty much equal to current EFFR of 4.33) to 3.66% Friday, or 70 bps.
The COVID sell-off in Q1 2020 went from a high in SPX of 3386 on Feb 19 to 2237 on March 23, a loss of 34%.
My personal bias is that this week’s actions could lead to further deterioration in global trade, and a generational stall/decline in US living standards. I could easily be wrong, but I don’t think this damage is undone with a pen stroke. Powell said on Friday that the Fed is in no hurry to cut rates, and is looking for confirmation in hard data. He expects tariffs “…are likely to raise inflation in coming quarters.” The market is telling us the Fed will be easing shortly, and that the decline this year is likely to be larger than the 50 bps penciled in at the March Survey of Projections for 2025.
May FF settled Friday at 9575.5. The FOMC is 7-May. No ease is 9567, an ease of 25 bps would be 9586.5 (7*4.33 + 24*4.08)/31. So as of Friday, not quite 50/50. The last FOMC of this year is 10-Dec. January 2026 FF settled 9668.5 or 3.315%, essentially 1% lower than the current EFFR of 4.33%, or twice as much as the Fed projection. FFF6 rallied 27 bps on the week. Peak contract on the SOFR strip is still the sixth slot (2nd red), SFRU6 at a price of 9693.5 or 3.065%. That contract traded a high price of 9719.5 on Friday.
For the sake of comparison, I am adding a chart of the rolling FIRST red, delineated by BBG as SFR6, on a chart going back almost to the start of this hiking cycle. First red, currently SFRM6 at 9690. Friday high was 9716.5.
The chart makes it look pretty easy. Sell it up here and book a 75 bp profit. However, the last couple of times the FF target was 50 to 100 bps higher than it is now. So no, it’s not that easy. Also, the last couple of times, the economy was in a period of fiscal dominance. Now we’re in a period of fiscal retrenchment. I’m not saying reds won’t retrace 50 to 75 from Friday’s close. Just saying it’s a little different.
The Fed eases to maintain economic activity in the face of uncertainty. On Friday Powell indicated the Fed can be patient. I don’t think so. JPM says 60% chance of recession. I don’t think so. We are 100% in the midst of recession now. Q1 GDP advance is released April 30. Atlanta Fed Q1 GDPNow is -2.8%. Gold-adjusted it’s -0.8%. Next payroll data May 2. FOMC is May 7.
Powell on Friday:
The limited hard data are consistent with a slower but still solid growth outlook. At the same time, surveys of households and businesses report dimming expectations and higher uncertainty about the outlook. Survey respondents point to the effects of new federal policies, especially related to trade. We are closely watching this tension between the hard and soft data.
Turning to monetary policy, we face a highly uncertain outlook with elevated risks of both higher unemployment and higher inflation.
While uncertainty remains elevated, it is now becoming clear that the tariff increases will be significantly larger than expected. The same is likely to be true of the economic effects, which will include higher inflation and slower growth. While tariffs are highly likely to generate at least a temporary rise in inflation, it is also possible that the effects could be more persistent.
Just a couple of more market notes. On a settlement basis, CLK5 (WTI) fell 10.6% this week. Low for the front contract since 2021.
Ten year treasury-tip breakeven fell 19 bps this week to 218. Low of last year, since 2021, was 203. High so far this year is 247.
Remarkable that 2/10 is just sitting in middle of this year’s range. Last at 33, high in Jan is 42. Red/gold spfr spread 42.75, new high for the year and just thru last September high of 41. I would expect further steepening.
BBB corporate to 10y treasury spread has risen from 104 bps in mid-Feb to 136 now. Yen-carry peak in August was 139. A few weeks ago I had mentioned HYG (hi-yield etf). I was long some puts for March expiry that barely scratched out a profit. Wish I reloaded, but I didn’t. That’s just the nature of trading. HYG low close in March was 78.52. This week a plunge down to 76.76, again, testing the level of the Aug 5 yen-carry volatility.
I now think red SOFR contracts see a soft cap around 2.5% or 9750. Could easily see spikes above that level, but I don’t think they would be sustained. To give an indication of a reach, on Friday SFRZ5 9900c 4.0 paid 10k. Settled 3.0 ref 9665.5. SFRZ5 9800c settled 8.5.
On the week, the contract that rallied most was the peak SFRU6, up 35 to 9693.5. However, on Friday the front contracts were strongest, with SFRM5 and SFRU5 both +10.5, to 9607.5 and 9642.0. Friday to Friday, SFRM5 +14 and U5 +22.5. I think SFRM5 can ultimately settle 9618 to 9625.
| 3/28/2025 | 4/4/2025 | chg | ||
| UST 2Y | 390.6 | 366.8 | -23.8 | |
| UST 5Y | 397.9 | 371.2 | -26.7 | |
| UST 10Y | 425.3 | 399.1 | -26.2 | wi 398.0 |
| UST 30Y | 463.1 | 438.9 | -24.2 | wi 439.3 |
| GERM 2Y | 201.9 | 182.7 | -19.2 | |
| GERM 10Y | 272.7 | 257.8 | -14.9 | |
| JPN 20Y | 224.5 | 195.6 | -28.9 | |
| CHINA 10Y | 181.5 | 172.0 | -9.5 | |
| SOFR M5/M6 | -62.5 | -82.5 | -20.0 | |
| SOFR M6/M7 | 3.0 | 5.5 | 2.5 | |
| SOFR M7/M8 | 15.0 | 16.0 | 1.0 | |
| EUR | 108.28 | 109.61 | 1.33 | |
| CRUDE (CLK5) | 69.36 | 61.99 | -7.37 | |
| SPX | 5580.94 | 5074.08 | -506.86 | -9.1% |
| VIX | 21.65 | 45.31 | 23.66 | |
| MOVE | 96.83 | 125.71 | 28.88 | |
