China pulls down everything

August 15, 2022

–CLU2 once again near recent lows at 88.20 this morning, down 3.89 as China’s weakening economic data caused a sharp and broad-based commodity slump.  Just over one month ago, CLU2 was over 115.  Sept Copper is 3.56, representing a sharp pullback from the rally over the past month.  Continued real estate end covid problems in China led to softer than expected economic data and a surprise rate cut by the PBOC which lowered “…the rate on 400 billion yuan of one-year medium-term lending facility loans to some financial institutions by 10 bps to 2.75% from 2.85%.” (RTRS).  Industrial Production and Retail Sales both missed and credit demand is weakening.  Small rate cut, but likely a signal of more to come.  US stocks slightly lower, gold off $20, grains hammered. China’s ten-yr is 2.66%, testing the year’s low set in January.  It was 7 years ago in August of 2015 that China surprised by devaluing the yuan.  

–US curve flattened Friday with reds down a bit more than 5 bps and golds up just over 5 bps.  Tens and bonds had tight ranges with a slight bias toward lower yields, with the ten-year yield ending at 2.85%.  ED 1-yr calendar spreads from the middle of next year to 2024 remain severely inverted and are pressing new lows this morning.  On Friday, EDM3/M4 settled -79 (lowest on the strip).  EDU3/U4 -69.5 and EDZ3/Z4 -59.0 (new lows).  

Posted on August 15, 2022 at 5:39 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

The Climb

August 14, 2022 – Weekly Comment

I was walking east down Monroe Street, coffee in hand, to enter the Chicago Mercantile Exchange from the south entrance.  It was a hazy and slightly humid August morning, the time of year when you notice it’s not quite as bright as it was a couple of weeks ago, as the days shorten.  I had crossed the bridge over the Chicago River and noticed a sparse crowd of people on the corner ahead, all looking up. In the next moment I learned there was a guy scaling the west face of the Sears Tower*, which is one block to the south of the CME, on the opposite side of Wacker Drive. 

I became riveted as one with the onlookers.  The opening bell is 7:20, and the hard rule is to be at the desk before the open.  If you’re hungover, you can sneak off to the breakroom for a nap after the 7:30 data, but you make the opening bell.  Period.  I knew I might not make the open that day, because I instantly committed to watching this guy make it to the top.

About ten minutes before 7 a.m. we actually lost sight of him, as he was obscured by wisps of clouds.  The building is 110 stories, 1450 feet tall.  The date was August 20, 1999, a Friday.  At about 7, he reached the top and was promptly arrested by Chicago’s finest.  I was thrilled for him and… I made the opening bell. 

The man was Alain Robert, known as the French Spider Man.  No tools, no ropes, he had already scaled many buildings in Europe and the Golden Gate Bridge. 

No, I am not going to compare the current time with 1999, though there was particular interest at the turn of the century due to Y2K.  My analogy is little more than an indulgence of memory to use in relation to the Fed’s current tightening campaign.  In terms of Alain Robert, either you make it or you don’t.  The Fed doesn’t know exactly where it is on the climb to higher rates, though the market has given a pretty good idea of the terminal rate at around 3.5%.  I feel as if we’re sort of in the area of wispy clouds where you can’t quite see how it’s going to unfold, but the market is giving strong hints.

Last week’s inflation data was slightly better than expected, but after an immediate post-CPI surge in treasury futures, prices quickly faded.  Yields closed a bit higher on the week, led by the long end.  The two year yield rose only 1 bp on the week to 3.255%, while tens rose 2 to 2.849% and thirties rose 7.5 to 3.117%.  In the month of August, TYU2 is repeatedly rejecting the highs.  The high of the month so far was 122-02 on August 2, coinciding with Pelosi’s Taiwan gambit.  That day’s settle was nearly 2 points off the high at 120-04.  On August 5th we had the strong employment report.  Pre-report high was 120-24+ while the settle was at the bottom of the range 119-12.  On August 10 came lower than expected CPI; TYU2 popped to 120-22, but closed in the bottom half of the range at 119-24.  The month’s price action has been bearish (the big range days are all rejections of the upside) and we’re moving ever closer to more serious QT beginning in September with $60 billion in treasuries being allowed to roll-off the Fed’s balance sheet, along with $35b in MBS.  This doubling in QT (from $30b and $17.5b per month) should be a negative for bonds, but if the effect is a drain in liquidity from stocks, then a rise in yields may be limited.  Recall that starting in October 2018 the Fed ratcheted up QT from $40 billion per month in the previous quarter to $50 billion, which perfectly coincided with the onset of a 20% Q4 slide in SPX.

The market ended the week essentially balanced in terms of the expectation for a 50 bp hike at the Sept 21 FOMC vs a 75 bp move.  October Fed Funds settled 9705.5 or 294.5 bps.  A 50 bp hike would cause a final settle at 283 and 75 would result in 308.   The question in terms of the Fed’s rate path will likely be settled by the September 2 employment report.  The next CPI release is 9/13.  I believe that the Jackson Hole conference (August 25 to 27) will provide a solid lean toward 50 bps and NFP will seal the deal.  Last year Powell spoke on the Friday morning of the conference, which would be the 26th this year, but I don’t see it on the Fed’s calendar yet. 

The lowest one-year calendar spread on the Eurodollar curve is EDM3/EDM4 at -79 (9616.5/9695.5).  On the SOFR curve it’s also M3/M4 at -75.5 (9646.0/9721.5).  These are about the lowest that one-yr calendars ever get.  Kashkari last week pushed back against the inverted short-term curve, saying “The idea that we’re going to start cutting rates early next year, when inflation is very likely going to be well in excess of our target, I just think it’s unrealistic.”  Well, you might not agree with the market Neel, but SFRM3/M4 was down 6 on the week (more inverted) and it had ended May at -30.5, so it has inverted an additional 45bps in the past two and a half months. 

In fact, if the Fed guides towards a more moderate pace of hiking, as Mary Daly did last week in citing a base case of 50 in September, the long end may continue to grind to higher rates (especially given the QT bump) which would go a long way in stifling enthusiasm for long dated risk assets. Inasmuch as rising stocks bolster confidence and, at the margin, increase consumption, thus underpinning inflation, an increase in bond yields might have the opposite effect, and aid in the destruction of demand which is central to the Fed’s goal.

If the Fed slows down the pace of tightening, then one might expect nearer contracts to rally, as aggressive hikes are priced out.  That seems to be the bias in the very near part of the curve.  For example, SFRZ2/Z3 one-year calendar settled at its high since the end of June, at -39.5.  The low in this spread was one month ago on July 13, at -73.  The most inverted spreads are moving a bit farther away in terms of time.

In summary, I would say that the interest rate curve is sending the following messages:
1) The pace of tightening is likely to slow down and be pushed slightly longer than had been priced in June

2) Restraining actions by the Fed, in terms of both rate hikes and QT, will put hard brakes on economic growth that will eventually result in easing.

3) The longer end of the curve must contend with inflation that may not come down as quickly as had been hoped, and with extra supply due to QT.  (In terms of stubborn inflation concerns, see chart which Is the Atlanta Fed’s Wage tracker).

News on the week includes
Monday: Empire Mfg
Tuesday: Housing Starts, Industrial Production
Wednesday: Retail sales and FOMC minutes
Thursday: Job Claims and Philly Fed, Existing Home Sales


UST 2Y324.4325.51.1
UST 5Y297.4297.70.3
UST 10Y282.8284.92.1
UST 30Y304.3311.77.4
GERM 2Y47.860.813.0
GERM 10Y95.598.73.2
JPN 30Y115.3109.7-5.6
CHINA 10Y274.6274.3-0.3
EURO$ U2/U32.525.022.5
EURO$ U3/U4-59.5-69.5-10.0
EURO$ U4/U5-22.0-26.5-4.5
CRUDE (active)89.0192.093.08

*Sears Tower is now known as Willis Tower

Posted on August 14, 2022 at 2:00 pm by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

Let the long end do the tightening work

August 12, 2022

–Bloomberg reports that Mary Daly favors a 50 bp hike in September.  I might be incorrect, but I think she directly channels Powell’s sentiments.  

–Large steepening trade over the past two sessions, even as inflation data were lower than expected.  Yesterday PPI was 9.8% yoy vs 10.4 expected, with Core 7.6 vs 7.7. Changes from Tuesday (at futures settle) to yesterday: 2yr 3.28 to 3.225.  30y 3.00 to 3.16.  A move of over 21 bps in two days as the bond contract has seen nothing but offers.  The market trades as if the Fed is planning to slow the pace of hikes due to mark-downs in growth estimates, while inflation remains stubborn with a slightly decreasing bias.

–New recent high in EDU2/EDU3 calendar at positive 19 (9663.5/9644.5). Previous 20-session range -27.5 to +13.  All one year calendars behind are negative.  EDZ2/EDZ2 is negative 56.5 (9609.0/9664.5).  It’s a stark difference between expectations for the end of this year, where EDU2/EDZ2 is 54.5 as the Fed continues its hiking campaign, while EDU3/EDZ3 is negative 20, when the weight of this year’s front-loaded tightening will buckle the knees of economic prospects. 

–News today includes U of Mich Inflation expectations, expected 5.1% for 1-year and 2.8% for 5-10yr.  The ten year treasury to tip breakeven has comfortably settled in around 2.5% over the past month. 

Posted on August 12, 2022 at 5:47 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

Defining near-term parameters

August 11, 2022

–Rate futures were strongly geared toward a high CPI number; EDZ2 traded 9600 or 4% just prior to the data, testing the NFP low from Friday which was 9599.5.  The actual month/month print of zero caused a panic short squeeze, taking EDZ2 to a high of 9626.5.  Similarly, EDU3 had a range of 9643 to 9668 or 25 bps, putting in the entire day’s range within a couple of minutes post-data.  EDU3 came back to settle at 9650.5, nearer to the low of the day as Evans and Kashkari suggested little change in the Fed’s rate path (3.5 to 4% by year-end). A piece by WSJ’s Nick Timiraos made the same point.  With two days until expiration 0EQ 9650^ settled 12.0.  Never thought we’d see a relief rally with Core yoy CPI 5.9%.

–FFV2 contract traded to a high of 9712 but fell back to settle at 9706 or 294, almost the exact midpoint between a hike of 50 (which would take EFFR to 283) and 75 (which would take EFFR to 308).  Prior to CPI the market was heavily leaning for a 75 bp hike at the Sept 21 FOMC; the low on NFP was 9696 or 304.  Yesterday’s high of 9712 is just 5 away from 50.  Perhaps the tone of the entire short end can be defined by FFV2: the parameters have been clearly set for the Sept FOMC.  Going further, FFV/FFX spread settled 36 almost the exact midpoint between 25 and 50 for the November 2  meeting.  Unsurprisingly implied vol declined somewhat.  Likely to be a slow two weeks going into Jackson Hole symposium, which starts August 25.

–The long end is a different story, with bonds closing lower on the day.  The 30yr yield ended +3 bps at futures settle to 303.4 in front of today’s auction.  If Fed is going to be hiking less aggressively then naturally the curve should steepen a bit, especially from very depressed levels.  2/10 ended at -43, up 5.7 from yesterday.  5/30 jumped 8.8 to 11.4.  

–PPI today expected 10.4 from 11.3, with Core 7.6 from 8.2.  Jobless Claims expected 260k. 

Posted on August 11, 2022 at 5:39 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

New curve lows in front of CPI

August 10, 2022

–CPI this morning expected 8.7% from 9.1% with Core 6.1% from 5.9%.  Yields rose, with tens up 4 bps in front of today’s auction, to 2.796%.  On the eurodollar curve, reds and greens were weakest, both packs settled -9.875.  New low in 2/10 at -48.6.  New low in red/gold euro$ pack spread at -61.  FFF3 settled 9641, or 359 bps, 126 over the current EFFR of 233, with three meetings to go.

–New high in EDU2/Z2 at 53.5, but U2/Z2 in SOFR is 41.5.  Trade action was biased to the downside.  Example, +30k SFRM3 9600/9550/9500p fly 4.75 to 5 (9651s) and +24k EDZ3 SFRZ3 9600/9550/9500p fly 4 to 4.5 (9691.5s).

Posted on August 10, 2022 at 5:48 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

Expecting (near) hikes, but every contract from EDZ2 to EDU5 is at a successively lower yield

August 9, 2022

–An early stock rally to new highs fizzled.  The US curve continued to flatten to new lows, with 2/10 spread down to -46, just 10 away from the 2000 low of -56.  The most negative one-year calendar on the ED curve is EDH3/EDH4 at -82.5.  The most positive one-year calendar is EDU2/EDU3 which settled 0.  Every other 1-yr calendar is inverted out to EDU5/EDU6.  Settles: whites +1.5. reds +8.25, greens +9.875, blues +9.875 and golds +9.25.   The red gold pack spread fell to a new low -53.625.  

–Large buyer (adding) of SFRH3 9625/9600ps for 10, about 20k on the day.  Settled 9.75 ref 9641.0

–Implied vol in rates was slightly softer on the day.

–News today includes NFIB Small Business Optimism expected 88 from 89.5.  The June report featured this headline: Small Business Expectations for Future Conditions Hits All-Time Low.  Hard to sugar coat that.  Unit Labor Costs and NonFarm Productivity for Q2 expected -5%.

–3 yr auction today.  CPI on Wednesday.

Posted on August 9, 2022 at 4:51 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

Blowout NFP causes further inversion

August 9, 2022

–Blowout NFP 528k with 3.5% rate and yoy AHE 5.2% vs expected 4.9%.  June Consumer Credit was released at the end of the day at a whopping $40.15b.  EDM3 was the weakest contract, closing down 24.5 at a price of 9627.0.  On the euro$ strip, EDZ2 is the lowest contract at 9603, close to 4%, and on the SOFR strip, H3 is the lowest at 9639.  FFV2, which captures the Sept FOMC, settled 9698.5 or 301.5.  If the Fed hikes 75 in Sept, the new EFFR will be 308.  Getting close.

–There was chatter of an emergency Fed hike which caused FFQ2 to trade 9764, 3 bps above the current 233 EFFR.  Settled 9765.75.

–Red euro$ pack (2nd year forward) settled 9676.75, down 22.625 on the day.  New lows in all spreads from reds back: red/green (2nd to 3rd yr) settled -44.25, and red/gold (2nd to 5th) settled -50.625.  2/10 treasury spread closed at a new low of -41.  The more aggressive that hikes are perceived going into year-end, the more the curve inverts.  Curve inversion is indicative of what used to be called a recession.  Although Mary Daly last week said the market was getting ahead of itself in terms of pricing future easing from the Fed, FFF3/FFF4 settled -45.5, a transparent marker of how much easing is priced for next year. (9643.5/9689.0).  FFF3 settled 9643.5 or 356.5, about 1.25% higher than current EFFR.  Jan’23 encompasses the next three FOMC meetings: Sept 21, Nov 2 and Dec 14. So if they’re putting in 75 for Sept, it doesn’t leave much for the other two.

–CPI Wednesday.

Posted on August 8, 2022 at 5:51 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

It’s a Bob Ross market

August 7, 2022 – weekly comment

The following tweet is by @_elvishpresley_

[every time I watch the joy of painting]

*5 minutes in*

yellow ochre?? for a snow-covered mountain?!  alright bob ross this time you’ve really lost it

*15 minutes in*

bob ross you son of a bitch

The Joy of Painting ran on tv from January 1983 to May 1994.  The format of the program started with a blank canvas on an easel.  Bob Ross would hold his palette and had a bunch of brushes to demonstrate various techniques, and by the end of the half hour he would produce a landscape painting. 

I had seen some of the early shows but was drawn further into the Bob Ross orbit during covid when we were stuck inside.  The show is strangely mesmerizing, and I don’t know if Covid is the reason, but Bob Ross has surged in popularity even with a younger cohort, perhaps partially due to the wine and painting workshops that are now popular for a night out. 

The tweet is funny because it’s accurate. He starts with a mountain and progressively works to the foreground, adding boulders and rivulets, saplings and wildflowers; it’s amazing.  All the while he’s saying in a smoothing voice, “Maybe we’d like a happy little tree here.”  And “maybe that tree needs a friend.”  All of a sudden a grove of pine trees appears.

As relates to the market:

[Last Friday SFRZ2 settles 9674.5]


SFRZ2 9600 puts?? buying a 4% strike?  everyone knows the Fed’s about to pivot.  this time you’ve gone too far! 

*friday NFP*

SFRZ2 9642.5. son of a bitch

Maybe we should print a happy little Service ISM number of 59.9.  Now pull out your big brush and imagine 598k NFP with an unemployment rate of just 3.5%. “It’s unbelievable that you can have that much power.  But on this canvas, you do.” And there’s your final portrait.  Recession-proof.

After the payroll number, one bank suggested the possibility of an intermeeting hike, taking FFQ2 down to a low of 9764.0 or 236 bps (settled 9765.75).  The next FOMC is Sept 21 and the Fed Effective rate since the July FOMC has been 233 bps (with one day at 232).  Printing 3 bps above the current EFFR with effectively 1/3rd of the month already pegged is astonishing. There are those that say the Fed has damaged its credibility, and certainly the economic projections support that view, but no one is doubting the possibility of large hikes to quell inflation.  October Fed Funds (FFV2) which captures the Sept 21 FOMC (along with any unscheduled hikes) settled 9698.5 or 301.5.  With current EFFR 233, a 50 bp hike would result in 283 or 9717 while 75 would be 308.  Obviously, the market has tilted heavily toward the latter.    

The internals of the employment report weren’t as strong as the headline suggested.  For example. The household survey has been diverging significantly from the headline establishment data.  However, it barely matters going into Tuesday’s CPI number (expected yoy 8.7 with Core 6.1).  Either the Fed tries to thread the needle to achieve a soft landing or it crushes inflation expectations. That’s the choice after CPI.  The easier goal to accomplish is the latter. 

On June 10 CPI printed 8.6 with Core 6.0, the highest numbers up to that time.  On June 14, rates topped, with the ten year yield 3.47%, and on June 16 SPX bottomed at 3667.  Just a week before, WTI had topped at 117.15 on June 8.  On July 13, CPI was 9.1 with core 5.9%.  CL was at 93.83.  The ten year yield went from 293.5 on July 13 to just 3.027 one week later (a rather modest move).  SPX made its most recent bottom on July 14 at 3790, just after CPI. The price of oil seems to have been the dominant factor.

Now, after Friday’s NFP the ten year yield jumped to 283 from 264 the previous week.  SPX rallied slightly on the week to 4145.  CLU2 is 89.01. There’s a bit of divergence here.  The administration wants the oil price down.  The Fed wants the ten year yield to be more restrictive.  Tens tend to follow the price of oil, but the administration is just about out of bullets in terms of draining the SPR.

With a head and shoulders top formation in the ten-year yield, I had thought a target of 2.40% was attainable.  That’s still plausible but the yield has to stay below the recent 303 high. 

Besides inflation data (CPI Tuesday and PPI Wednesday) the treasury auctions 3s, 10s and 30s Tuesday, Wednesday, Thursday.  The 2/10 treasury spread made a new low of -41 this week.  The ten year yield is 283, 50 above the current EFFR and 54 above the SOFR rate.  If the Fed hikes 50 in September then positive carry likely vanishes.  The banking model of lend long, borrow short is facing increasing headwinds.


The 2-yr treasury yield surged 34 bps this week to 3.24%.  The 6/14 high was 3.43% and the subsequent 7/19 high was 3.24%.  The trend for the short end is toward higher yields.  SFRM3 (the biggest mover) was 9703.5 on 7/29, but settled 9657 Friday, for a total 46.5 bps as the market pivoted away from the Fed pivot.  SFRH3 which is the lowest contract on the strip at 9639 or 3.61%, was down 44 bps. 

While the 2 yr yield is just 19 bps away from the June high, SFRH3 is still 40 away from the low settle on 6/14 of 9599, which, by the way, is the lowest any near SOFR contract has settled on the move.  SFRU3 at 9677 is fully 38 above the SFRH3 price.  Said another way, there is a strong gravitational pull lower on SFRU3, which argues for the idea of being long Sept midcurve put flies on SFRU3, with a  target around 25 lower than here, depending on your view of actual Fed hikes. 

UST 2Y289.7324.434.7
UST 5Y269.3297.428.1
UST 10Y264.3283.619.3wi 2.830/825
UST 30Y297.7306.58.8wi 3.045/040
GERM 2Y28.147.819.7
GERM 10Y81.795.513.8
JPN 30Y119.5115.3-4.2
CHINA 10Y276.5274.6-1.9
EURO$ U2/U3-25.0  2.5 27.5
EURO$ U3/U4-50.5-59.5-9.0
EURO$ U4/U5-13.5-22.0-8.5
CRUDE (active)98.6289.01-9.61

Posted on August 7, 2022 at 10:14 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

Employment day

August 5, 2022

–Yields slipped in front of today’s Employment report.  The ten year fell 7.7 bps to 2.668%.  On the eurodollar curve, greens (3rd year out) have been the most volatile, and rallied 13 bps today.  NFP is expected 250k, though stronger numbers would fit the administration’s and Fed’s narrative a bit better.  Wages yoy expected 4.9% from 5.1.

–Large exit of the SFRZ2/SFRZ3 spread on a block: 57k were sold at -54.0, an exit from the July 26 buy of 67k at -63.  SFRZ2/SFRZ3 settled -55.5.  By comparison, EDZ2/EDZ3 settled -69.0.  The libor transition occurs at the end of June 2023, so SPRZ3/EDZ3 is pegged at 26.  The relative weakness of EDZ2 is attributable to turn-of-year pressure which seems to be worth about 9 bps and credit concerns, about 4-5 bps.

–Implied vol is fading in the short end as the market has determined that Fed chatter of 75 at the September meeting is likely empty talk, and if it DID occur it would probably shave future hikes.  Job cut announcements are becoming more prevalent, and though gasoline has come down, a higher cost of living has become accepted if not acceptable. New low in red/green euro$ pack spread at -42.625. As previously mentioned, this spread is at a new historical low at least since 1998…low in 2000 was -9.375, barely inverted in 2006 and 2007, and low in 2019 was -9.625.  Perhaps Mary Daly can keep an eye on that with respect to how the market perceives forward Fed policy, because this spread is blithely ignoring her protestations that the Fed won’t ease in 2024.  Below is a chart from a couple of days ago.

Posted on August 5, 2022 at 5:41 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

Flight to safety fizzles

August 3, 2022

–Large jump in yields as reaction to Pelosi’s Taiwan trip fizzled and both Evans and Mester indicated support for 50 to 75 at the September meeting.  Current Fed Effective has printed both 232 and 233.  another 50 would be 283 or 9717.  FFV2 settled 9706.5…pretty close to the midpoint between 50 and 75 in terms of pricing for the Sept 21 FOMC. 

–Green pack (3rd year out) was the leader in terms of yield increase, with the price down 25 bps to just under 9732.  That price is still 109 higher than EDZ2 at 9623, the lowest contract on the strip.  EDZ2 is consistent with FF of about 3.5% by year end.  Jan’23 FF contract settled 9661, down 10 on the day) or 3.39%.  Instead of the green pack, let’s consider the average price of the four 2024 contracts: EDH4 thru EDZ4 averages 9716 or 2.84%, consistent with a FF target of 2.5 to 2.75%.  That’s how we get to a soft landing: Higher rates to slow things down and then lower rates to cushion the blow.  It’s all in the handbook: Fed Presidents for Dummies.

–After making new highs for the move, tens and bonds had large outside ranges and closed near the lows.  Bearish signal on long rates in front of next week’s auctions of 3s, 10s, 30s. 2/10 spread made a new low of -33 bps.  Twos closed 3.077% while 5s, 10s and 30s are all under 3%.  Strong temptation to buy the steepener if the market gets a bit closer to pricing 75.  

–News today includes ISM Services expected 63.5 from 55.3.  Factory Orders as well.

Posted on August 3, 2022 at 5:37 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options