Fed on hold…for now

June 16, 2024
**************

–Once again the near one-year SOFR calendars slipped to new lows.  SFRU4/U5 down 7 on the day to -112.5 (9485/9597.5).  Z4/Z5 down 4 on the day to -95 (9518/9613).  Also, new low in 2/10 at -48.2 with the ten-year yield down 6 bps to 4.217%.  Fed officials are in no hurry to cut rates; Kugler’s speech is a case in point.  She gave comprehensive evidence to support optimism for decelerating inflation, but concluded by saying, “I believe that policy has more work to do, which is why I supported the FOMC’s decision last week to keep the federal funds rate in a range of 5-1/4 to 5-1/2 percent. We need to see more progress toward 2 percent inflation before I will have confidence that inflation is moving sustainably toward that objective.”

https://www.federalreserve.gov/newsevents/speech/kugler20240618a.htm

–In any case, near contracts are constrained by the Fed’s resolve to hold rates steady in the near term, while back contracts reflect lower future rates, projecting a slower economy and lower inflation.  SFRZ’25 at 9613 to SFRZ’27 at 9645 are between 3.5% and 3.875%.  

–At the end of the session, just after futures settlements, there was a buyer of 55k FFQ4 at 9469.5.  Contract settled 9469; open interest was up 45k so appears to be new buyer.  If the Fed were to ease in July, FFQ should settle 9492.  Without an ease, a grind down toward June and July contracts at 9467 will occur.

This article by Walter Deemer was posted on x by Helene Meisler.  It’s from March 3, 2000, pre-dating the Nasdaq high by only a few weeks.
https://x.com/hmeisler/status/1803070784497209522

This excerpt sums it up:
During my now 36-plus years in this business, I’ve never seen anything even remotely comparable to the current chasm in the stock market between New Economy and Old Economy stocks; the NASDAQ, which rose 85% in 1999, has risen another 16% so far this year while the Dow-Jones Industrial average (whose 30 components happen to earn more than all of the NASDAQ stocks combined do) was recently off more than 14%. But it is not the unprecedented market chasm that prompts this piece — it is the accompanying arrogance on the part of all too many New Economy (aggressive growth) managers, as demonstrated in such things as the writings of James Cramer of TheStreet.com and the utterances of a seemingly-endless parade of hedge fund managers on CNBC. These managers sneeringly inform those unfortunate souls who are not invested in the same Cisco’s and Qualcomm’s as they are (or, more likely, in the same JDS’s and Xcelera’s as they are) that “Old Economy stocks are relics of the past; if you don’t own the Cisco’s and Qualcomm’s of the world, no matter what their valuations may be, you’re living and investing in the past, not the future. This is the way it is and this is the way it’s going to be from now on.” (The logic of the subset of managers who are well aware that this kind of thing can’t last, but are cocky enough to think they can get out before the final whistle blows — even though they readily admit that most players won’t — needs no further comment on my part.)

NOTE: Since the end of October, when Yellen helped juice the market by shifting gov’t borrowing to t-bills rather than coupons, NDX is up 41%.

Posted on June 19, 2024 at 5:21 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

brief notes

June 18, 2024

**************

–Yields up on treasury curve as part of Friday’s safety bid unwound. Tens up 6.8 bps to 4.277%

–Retail Sales today, expected 0.3%, ex-auto and gas +0.4%.  Industrial Production +0.3%

–Speakers includes Barkin, Collins, Logan, Kugler, Musalem and Goolsbee.

–Powell to testify in front of Congress on July 9.  July midcurves expire July 12.  July treasury options expire Friday.  TYN4 110.5^ settled 34 yesterday.

–Ueda suggests that BOJ could raise rates in July, but $/yen still over 158.

Posted on June 18, 2024 at 5:12 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

10y breakeven supports the Fed

June 17, 2024
***************

–Friday featured new recent lows in near SOFR calendars, with SFRU4/Z4 -33.5 (9487.5/9521) and SFRU4/U5 1-yr calendar at -112 (9487.5/9599.5) down 23.5 on the week.  SFRZ5 was the trailblazing contract, surging 30.5 bps since last Friday, to 9615 or 3.85%.  This level is right back to the MARCH level for Fed Funds (end of 2025) in the SEP dotplot, which was 3.875%…in June that projection was ratcheted up to 4.125%.  Tens ended Friday at 4.21%, down 2.6 bps on the day.  SFRM5 also ended Friday at 4.21, or a price of 9579.  If the market is right about easing scenarios, then we can roughly expect 2/10 to be dis-inverted by next summer!

–Other interesting range extensions:  10y breakeven (treasury vs tip) ended Friday at 218 bps, near the low end of the range since the Fed began its hiking campaign. In mid-April this spread was holding above 240.  Also, Russell 2k vs Nasdaq 100 as a ratio is making historic new lows. 

–Fed officials are generally advocating patience in terms of rate cuts (Mester, Kashkari).  There are a lot of Fed speakers slated this week: Harker today.  Barkin, Collins, Kugler, Logan, Musalem (new St Louis President), Goolsbee tomorrow.  Also tomorrow, Retail Sales and 20y auction.  Wednesday is an abbreviated  screen session.

Posted on June 17, 2024 at 5:14 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

Erreurs ont été commises  (Errors were made)

June 16, 2024 – Weekly Comment
************************************

“When I make a mistake, I don’t make it twice.  I make it 20 times.” – Jimmy Place (Warrior podcast)

SOFR calendars made new recent lows as the Fed pushed easing further out on the calendar with the dot plot indicating just one ease for 2024 (and 4 more in 2025).  CPI data was lower than expected – another tailwind for rate futures.  Accentuating the move was Macron’s decision to call snap elections in France, which sparked turmoil in European spreads. 

All treasury contracts completely erased lingering bearishness from the previous Friday’s NFP (and then some).  With June SOFR options having expired, I moved the front spreads to September contracts.  The chart below is a constant maturity 3rd to 7th SOFR future spread (bottom panel is spread).  For the past three months this chart represents SFRU4/SFRU5, at a level of -112 (9487.5/9599.5).  Next week on BBG, U4U5 will be 2nd to 6th



The exact syntax isn’t important, it’s that calendar spreads are making new recent lows.  I used a two-year snapshot in order to capture absolute lows associated with the SVB failure and fallout. At that time, in May 2023, the 3rd to 7th spread posted a low of -177 and 2nd to 6th (what I would consider the front spread) was -192.  Those levels reflected potential easing of the magnitudes seen in 2001 and 2007-08, when the Fed slashed a couple of hundred basis points over a few quarters.  Obviously, SVB was a false alarm, and relatively contained.  Therefore, calendar spreads rallied as deferred contracts sold off in summer and fall of 2023, i.e. easing assumptions compressed.  As can be seen on the chart, the current decline is a function of deferred contracts rallying.  On the top panel the SFRU4 contract is in white; the move has been sideways.  SFRU5 is in amber.  Last week SFRU4 rallied 6.5 bps, while SFRU5 and Z5 had the biggest jumps on the curve, +30 to 9599.5 and +30.5 to 9615.0.  The ten-year yield declined 22 bps on the week to 4.209%.

In terms of European angst, I would just note that SX7E, the EuroStoxx Bank Index is down 10% from the high posted in mid-May.  At 133.73 it’s back where it was in mid-March. The CAC 40  is down 8.9% from mid-May (down 5% last week).  By comparison, DAX is only down 4.6% from May’s high. 

In the US, the ratio of RTY/NDX (Russell 2k to Nasdaq 100) made a new historic low this week of 0.102. That’s even lower than the dotcom bubble of March 2000, when the ratio low was 0.12.

MSFT, AAPL and NDVA combined are at a record 21% weighting of the S&P500, and each sports a market cap over $3T (each one larger than the total cap of Russell 2k).  It’s worth noting that RTY is actually DOWN 1% on the year.  However, RTY is handily outperforming KRE (the US regional bank index) which is down 12% ytd.


There’s a clip in The Big Short where Brownfield Capital (Charlie Geller) suggests shorting AA tranches of CDOs, because when the bad stuff implodes, the AAs will also be pulled down.  I was taught, and I try to adhere to this rule: short the weakest stuff, not the strongest.  Markets typically crash, not from highs, but when they have already been cut in price.  So, I am NOT suggesting that anyone follow my lead and buy AAPL puts like I did last week. (Hence the Jimmy Place* quote at top).  There’s just no way I buy into the AI hype for AAPL. To cite another line from The Big Short: “It’s possible we’re in a completely fraudulent system.” -Dr Michael Burry.

My sense is that the US consumer is well underway in a process of retrenchment.  On Tuesday, Retail Sales may (or may not) buttress that assumption, expected +0.3% m/m and +0.4% ex-auto and gas.  Credit card delinquency rates, all commercial banks, are at a new cycle high of 3.16% in Q1 (though lower than they were from the 1990’s going into the GFC).  However, credit card delinquency rates in banks not among the largest 100 are at a RECORD high 7.79%. (Short the weakest).   

Housing data later in the week.  XHB, the homebuilder ETF has been sideways from 100 to 110 since late Feb.    

OTHER THOUGHTS / TRADES

FFQ4 settled 9470.5, up just 1.5 on the week. This contract captures the July 31 FOMC, and indicates about a 15% chance of a 25 bp cut.  FFV4 captures the Sept 18 FOMC, and it settled 9487 or 5.13%, 20 bps lower in yield than the current Fed Effective of 5.33%.  The market is betting on a Sept ease…

August options on SFRU4 expire 16-August.  As of now, it’s unlikely that the Fed would ease in July.  But IF that were to happen, then the Sept 18 FOMC would be in play as well.  The August CPI number is 8/14 and Jackson Hole is August 22-24  (Just after the August 19-22 Democratic Convention in Chicago).  SFRQ4 9500/9512.5cs settled 1.25.  Reasonable wildcard buy. 

Note that Friday July 5 is a normal trading day.  The Employment Report is scheduled for release on that Friday, though July 4 will only have an abbreviated futures session (for trade date 7/5). 

This Wednesday is also an abbreviated screen session.  Might not be at desk, pending Tues conditions.

6/7/20246/14/2024chg
UST 2Y487.0468.3-18.7
UST 5Y445.2422.4-22.8
UST 10Y442.8420.9-21.9
UST 30Y454.7434.9-19.8
GERM 2Y308.3276.3-32.0
GERM 10Y262.0236.0-26.0
JPN 20Y176.5173.9-2.6
CHINA 10Y231.0229.7-1.3
SOFR U4/U5-88.5-112.0-23.5
SOFR U5/U6-41.0-38.52.5
SOFR U6/U7-10.0-7.52.5
EUR108.18107.05-1.13
CRUDE (CLQ4)75.2278.052.83
SPX5346.995431.6084.611.6%
VIX12.2212.660.44

*Jimmy Place (ACE if I recall correctly) was a filling broker in Eurodollar futures in the heyday of the contract.

Posted on June 16, 2024 at 1:56 pm by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

Yields drop on low inflation…and France

June 14, 2024
***************

–PPI supported the slowing inflation narrative with month/month readings of -0.2% and 0.0 Core.  Yields continued to drop, with tens down 5.5 bps to 4.236%.  Solid 30y auction; the 30 year yield ended at 4.40%.  That yield level, 4.40%, is the halfway retracement from the low yield posted in late December, 3.954% to the high in late April of 4.81%.  It took 4 months to go from the low yield to high, and about 1.5 months to retrace halfway back.

–New lows (for second day in a row) in near one-year SOFR calendar spreads:   
M4/M5 -112 (9465.5/9577.5) and U4/U5 -111.5 (9486.5/9598).
In M4/M5 the low settle this year was -132.5 at the start of February.
In U4/U5 the lowest settle was -109.5 in early March.  It ran all the way up to -65 at the end of April as reds sold off, but today’s settle is a NEW LOW for that particular spread.  
Also new recent low in ten year breakeven (10y yield vs 10y TIP yield) at 221 bps. Edging a bit nearer to the Fed’s target. 

–Snap election gambit by Macron is creating uncertainty.  EUR now 1.0680 and looks like it can test April’s lows of 106.  The spread between bunds and oats is widening, as shown on chart below (from end of day yesterday). In May the spread was 47 to 49 bps and now 70 (or 80 this morning). US rate vol firmed (rebounded slightly) yesterday as yields fell.  

–BOJ said it would trim bond buying but left details for next meeting.  Yen weakened but recovered.  

Friday’s news includes U of Mich Consumer Sentiment and Inflation Expectations

Posted on June 14, 2024 at 5:19 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

Pushing the ease forward

June 13, 2024
***************

–Better than expected inflation news as month/month CPI was 0%. On a yoy basis, headline 3.3% and Core 3.4%.  The FOMC dots shifted to just one ease into the end of this year with the estimate for FF at 5.1% from 4.6% in March.  The projection for 2025 was also raised to 4.1% from 3.9%.  In the press conference Powell stressed risks in trying to thread the needle between holding policy rates high for too long and easing too soon.  The Core PCE inflation estimates were raised to 2.8% from 2.6% in 2024 and 2.3% from 2.2% in 2025.  In terms of a ‘real’ rate, 5.1% vs 2.8% Core PCE is 2.3% for 2024 and 4.1% vs 2.3% is 1.8% for 2025, so the Fed expects to remain relatively restrictive for the foreseeable future.

–Market reaction included new lows in near SOFR 1-year calendar spreads.   The lowest spread is now U4/U5 at -104 (9484.5/9588.5) down 10 on the day.  Reds, the second year forward, were the strongest contracts on the strip as the Fed masterfully keeps moving the easing goalposts a little farther away in time. (Whites +4.625, reds +13.375, greens +13.5, blues +11.75)  Stocks exploded higher.  Implied vol in near SOFR contracts was hammered.  For example, on Tuesday SFRU4 9481.25^ settled 18.25 and yesterday at 15.0.  While the dots project one ease into year-end, FFF5 settled +6 at 9512.5 or 4.875%, which is 45.5 bps under the current EFFR.  The market is still leaning toward the idea of two eases.

–I would note that in the March SEP, the FF projection difference between 2024 and 2025 was 75 bps (4.6 and 3.9).  Now the difference is 100 bps, (5.1 and 4.1) which, in a way supports the deeper inversion between fronts and reds.  Z4/Z5 settled at a new recent low -91, down 8 on the day (9513/9604).

–The March FOMC was on 3/20.  At that time, Dec contract settles vs FF projections were as follow:
SFRZ4 9551.5 or 4.485% vs FF projection at 4.625%, so Z4 had an additional 14 bps of ease priced
SFRZ5 9624.0 or 3.760% vs FF projection at 3.875%, so Z5 had an additional 11.5 bps of ease 
SFRZ6 9633.5 or 3.665% vs FF projection at 3.125%. So Z6 was 54 bps HIGHER than the Fed projection

Yesterday
SFRZ4 9513.0 or 4.870% vs FF projection at 5.125%, so Z4 had an additional 25.5 bps of ease priced
SFRZ5 9604.0 or 3.960% vs FF projection at 4.125%, so Z5 had an additional 16.5 bps of ease 
SFRZ6 9630.5 or 3.695% vs FF projection at 3.125%. So Z6 was 57 bps HIGHER than the Fed projection

It seems as if the market believes that inflation will remain durably higher over the next few years and that forward rates over the next few years are likely capped between 3 and 3.5%.

–PPI and 30 yr auction today.

Posted on June 13, 2024 at 5:46 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

CPI and FOMC

June 12, 2024
***************

–CPI and FOMC today.  CPI month/month +0.1 expected with Core +0.3.  On a year/year basis headline expected 3.4% from 3.4% last and Core 3.5% from 3.6%. 

–FOMC March 2024 ‘dot’ or estimate for end-of-2024 FF was 4.6% or three eases.  Today that dot will either show 1 or 2 eases, my guess is 2 which would take the estimate to 4.9%.  SFRZ4 settled at 9507 (4.93%) +2.5 on the day, so two eases would probably lead to some upside in the contract.  Recent low settle was 9497 at the end of last month.  SFRM4 is 9465.5 so one ease could roughly be estimated at 9490, but in my opinion it’s highly unlikely that SFRZ4 would test that level.   The 2025 dot was 3.9 in March; that may have to push a bit higher as well.  SFRZ5 settled 9590 or 4.1%.  SFRZ4/Z5 one-year calendar settled -83, or approximately three eases over next year; the spread has been in a range of -68.5 to -84.5 over the past month.  

–It’s not the Fed’s job to comment on the level of USD, but $/yen remains above 157, CNY is at the low of the year vs USD and Indian Rupee is also at a historic low.  Dollar liabilities are getting harder to service.  My guess is that weakening labor (notwithstanding last Friday’s report) and a strong dollar will result in a somewhat dovish press conference.

–Yields fell yesterday.  Ten year auction was solidly received, the yield fell about 6.5 bps on the day to 4.402%.  AAPL exploded through the upper end of the range, closing at 207.15, up 7.25%, adding somewhere around $200 billion in market cap.  Overall liquidity conditions seem frothy.

Posted on June 12, 2024 at 5:07 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

Ten year auction today. CPI and FOMC tomorrow

June 11, 2024
***************

–Yields edged a bit higher yesterday, with tens up 4 bps to 4.467%.  European bond yields surged on election results; the French 10y rose over 12 bps to 3.223% as Macron called for a new snap election.  Domestically, the three-year tailed with tens being auctioned today, followed by 30s Thursday.  CPI and FOMC tomorrow. 

–AAPL reversal day, closed -1.9% as yesterday’s AI presentation underwhelmed the market.  There is now a triple top around 200, having just failed that level in July of last year, then again in December, and now yesterday. (yest high 197.30).  Top of the AI craze?

–CLN4 up 2.38 late to 79.91/bbl.  Besides the 10y auction, news today includes the NFIB Small Business Optimism Index, which has been consistently weak.  It’s expected 89.7, same as last month. 

–SFRZ4 was only down -0.5 yesterday to 9504.5 or 4.955%, essentially pricing the midpoint of one or two rate cuts by year end.  The lowest contract on the strip is front June at 9465.25 and the peak contract is SFRU’27 at 9615.5.  Over a greater than three year span the spread is just 150 bps.  The gold pack, 5th year forward, settled yesterday just above 9610 or 3.90%.  Not long ago the one-year calendars were more inverted than 150 bps.  In 2001 and 2007-8 the Fed was forced to cut aggressively.  In 2001, the Fed slashed 275 in six months, and in 2007 to 08, 300 bps of cuts in six months…with more cuts following in each cycle.  As of now, the SOFR strip is projecting a ‘soft landing’ as rates 3, 4 and 5 years forward hover between 3.75 and 4%.

Posted on June 11, 2024 at 5:23 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

Euro reacts to elections

June 10, 2024
**************

–EUR was 108.93 (ECM4) on Thursday’s close and has now plunged to 107.55 following weekend elections in Europe.  In Germany AfD made a strong showing and in France, Macron is calling for snap elections after his party was trounced, while “Italy’s PM Meloni comes out on top in EU vote, strengthening her hand…and boosting her standing both at home and abroad.” (RTRS). US equities are also under profit-taking pressure as are US treasuries, with downside follow-through in the wake of Friday’s higher than expected 272k NFP.  Supply is a concern with 3, 10 and 30 year auctions slated this week (Mon, Tues, Thurs).

–Yesterday, “A Ukrainian military source cited by Sky News confirmed this is’ the first Ukrainian Air Force (UAF) air-delivered munition delivered against a target within Russia’.”  

–This week’s news includes CPI and FOMC on Wednesday.  FOMC dot-plot will shave at least one ease from the estimate for 2024, as we’re already halfway through the year.  As of Friday’s settles in December SOFR contracts, the market is pricing between 1 and 2 eases in 2024 and another 3 cuts in 2025.  SFRZ4 settled 9505, or 4.95%.  Current EFFR is 5.33, one ease would be 5.08% or 9492 while two cuts would equate to 4,83% or 9517.  Of course, SOFR contracts also price odds for FOMC meetings embedded in their terms, but for now we can say the market is priced for 1 to 2 cuts in 2024, and SFRZ5 is 9597.5 or 4.025%.  Therefore Z4/Z5 is -79.5.  The SOFR curve repriced on Friday from a lean toward 4 cuts in a given year to more like 3-3.5.

–Implied vol was hit in rate futures, though the expiring midcurves aren’t particularly cheap.  0QM4 9550^ settled 18 vs SFRM5 9550.5, 2QM4 9600^ settled 18.0 vs SFRM6 9604.5.  VIX ended Friday at 12.22,  A WSJ article over the weekend: ‘Beneath the calm market, stocks are going haywire’.  Here’s a snippet:
“Under the calm surface, however, there is furious paddling. Only once in the past 25 years have stocks swung about like this while the overall market stayed so placid. Traders in the options markets are betting on its continuing: Prices indicate the biggest swings in stocks for at least 10 years relative to the prevailing calm for the S&P 500.” 
–Kevin Muir (MacroTourist) had cited the ‘dispersion trade’ as a possible risk some time ago…

Posted on June 10, 2024 at 5:21 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

Net Worth looks fine…

June 9, 2024 – Weekly comment
***********************************

The global economic system is debt-based.  Below is an image of US Household Net Worth, released by the Fed last week in the Z.1 report, updated through Q1.

Liabilities are barely increasing (red bars), yet assets (equites and residential RE) just keep powering higher.  That’s what various officials mean when they say Household balance sheets are in good shape.  Of course, that’s in the aggregate.  The coveted assets of the lower end of the balance sheet spectrum are torches and pitchforks.  I guess this chart would make sense if productivity were on a tear higher, and maybe part of it is the AI craze.  The other way it makes sense is if the measuring stick of the US dollar is deteriorating, which of course it has done, in terms of purchasing power. 

After the 2007/09 Great Financial Crisis there was a lot of talk about the shifting of liabilities from the private sector to the Gov’t balance sheet.  In that context, the above chart makes more sense. 

Around 10 years ago, Q4 2014, HH Assets were $101T, Liabilities $14T and NW $87T.  In Q1 2024, Assets are $181T, Liabilities $21T and NW (rounded) has nearly doubled to $161.  The liability side has really been kept in check, up only 50%.  Must be a really frugal and innovative populace.  Of course, when one considers that at the end of 2014, Federal Gov’t Debt was $14.4T is 2014 and has now more than doubled to $29.9T (Z.1), it begins to appear as though private debts HAVE shifted to the public balance sheet, boosting equities, but perhaps making the aggregate snapshot look less healthy.  FT’s top headline Sunday is ‘IMF warns US on ballooning fiscal debt’.

In the movie Planes Trains and Automobiles, there’s a funny scene where Del Griffith, shower curtain ring salesman (John Candy), and Neal Page, slick advertising exec (Steve Martin) are stranded on the highway, watching the rental car they were just in smolder and burn after a harrowing accident.  Neal Page starts to laugh a little and Del Griffith, who caused the accident, is surprised, but he starts to laugh too. 


Finally Del says, “What?”  And Neal responds, “You finally did it to yourself.  Good luck turning the car in!”  Now they’re laughing harder and harder and Neal asks, “How could you rent that thing anyway, without a credit card?” Del, “Oh I gave this girl behind the counter a set of shower curtain rings.”  Then Neal becomes serious and says, “You can’t rent a car with shower curtain rings Del.”  It turns out that Del used Neal’s Diner Club credit card (a relic of the past).

I sort of consider Del Griffith to be the Federal Gov’t and Neal Page the public.  I came to that conclusion after Friday’s employment data which sparked a 15 bp jump in the 10y yield to 4.428%.  I’m not saying the data was manipulated to appear strong (though there seems to be quite a divergence between the establishment and household surveys).  Maybe it’s just that the BLS’s Birth/Death plug factor isn’t quite capturing the latter half.  In any case, Fed’l Gov’t efforts to juice economic growth in whatever way possible before the election might come back to scorch the public through higher yields. Maybe it’s going to be hard to pay for things with a charred Diner’s Club card.  It’s funny when it just appears that an inept gov’t is buried in debt (You did it to yourself!).  It’s not so amusing when the public starts to get the bill, in one way or another.

Auctions of 3 ($58b), 10 ($39b) and 30 ($22b) years are Monday, Tuesday and Thursday, bracketing CPI and the FOMC on Wednesday.  The last auction cycle didn’t go that well…everything tailed.  With respect to the FOMC, the new 2024 FF dot projections should be interesting.  In March, the 2024 estimate was 4.6% or three eases, and the 2025 estimate was 3.9, up from December’s 3.6.  The main question is whether the 2024 dot will shift to just one cut or two; my guess is two.  So that would take the end-of-2024 FF estimate to 4.9.  (SFRZ4 settled Friday at 9505 or 4.95%, essentially pricing 2 cuts). But then can 2025 remain constant at 3.9?  That may have to shift up slightly as well, which the market expects.  SFRZ5 settled 9584.5 or 4.155%; Z4/Z5 spread at -79.5.  Considering the PCE deflator, for end of 2024 the PCE price index was penciled in at 2.4, last reported at 2.7%.  Core was estimated 2.6, last at 2.75%.  Those will likely remain the same, though the risk is a shift higher.  Overall, I would deem the dot-plot risk to be slightly hawkish, which will be countered perhaps, by a more dovish press conference.  A counterbalance to the ECB’s ease followed by a hawkish press conference.

FFQ4 settled at 9469 or 5.31%, just 2 lower than the current 5.33% Fed Effective and down 1.5 on the week.  Therefore, there is little priced in for a July 31 rate cut.  FFF5 settled 9504 or 4.96%, pricing between 1 and 2 cuts by year end. 

CPI yoy expected 3.4% from 3.4 last.  Ex Food and Energy expected 3.5 from 3.6.  On Monday, NFIB Small Business Optimism is expected 89.6 from 89.7 last, still lower than the COVID spike.  The divergence between data points like NFIB and Chicago PMI, which both indicate recession, and data like NFP is rarely more stark. 


5/31/20246/7/2024chg
UST 2Y489.1487.0-2.1
UST 5Y452.6445.2-7.4
UST 10Y451.2442.8-8.4 wi 442.7
UST 30Y465.2454.7-10.5 wi 454.7
GERM 2Y309.7308.3-1.4
GERM 10Y266.4262.0-4.4
JPN 20Y187.2176.5-10.7
CHINA 10Y231.9231.0-0.9
SOFR U4/U5-81.5-88.5-7.0
SOFR U5/U6-38.5-41.0-2.5
SOFR U6/U7-8.5-10.0-1.5
EUR108.48108.18-0.30
CRUDE (CLQ4)76.7375.22-1.51
SPX5277.515346.9969.481.3%
VIX12.9212.22-0.70
Posted on June 9, 2024 at 7:07 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options