It’s About Jobs

July 18, 2024

–Rates eased a bit in a quiet session, with tens -2.5 bps to 4.142%.  SPX fell 1.4% and NazComp fell twice as much, -2.77%.  Waller spoke yesterday; he’s an important voice on the Fed, and while speeches earlier in the year were ‘What’s the Rush’ and ‘There’s Still No Rush’, this one was ‘Getting Closer’ [with respect to cutting the FF target].  He ended his speech with three scenarios: 1) continued good readings on inflation. 2) uneven inflation data, which is more likely but leads to less certainty of a near term ease 3) resurgent inflation data.  Before concluding with these scenarios, he had deemed the labor market to be in a ‘sweet spot’, but is quite cognizant that what had been a tight jobs market “has changed dramatically.”  I would consider a fourth scenario: uneven price data but notable deterioration in labor.  Would that forestall a near-term ease?  

–In any case, action in the short end of the curve revealed a modicum of bias in terms of pricing a greater magnitude of ease, pushed slightly further back.  SFRU4 settled down 1 at 9495, but contracts from Dec’25 forward were +3 to +3.5.  Yesterday I noted that the pre-election, post-election calendar spread of SFRU4/SFRH5 closed at a new low of -79.5 (9495/9574.5).  Fairly aggressive to price 3 eases in a six month spread.  SFRU4/U5 also closed at new low -131 (9495/9626).   Obviously these spreads aren’t always ‘right’, for example the near 6-month calendar in January was -80 to -90.  But….No Ease. 

–Today’s news includes Jobless Claims expected 225-230k (what happens on >250k) and Philly Fed expected 2.9 from 1.3.   

Posted on July 18, 2024 at 5:33 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

SPX priced in Gold. Waller today.

July 17, 2024

–Retail Sales stronger than expected yesterday, though in real terms, still weak.  After fairly aggressive steepening from mid-June to Monday, the curve retraced, with 2’s down only 1.1 bp to 4.442% and tens down 6.2 to 4.167%.  Both SPX and Gold made new highs, but as the attached chart shows, SPX priced in gold is breaking.

–KRE regional bank ETF has simply exploded since mid-June, from 46 to a new ytd high of 56 yesterday (+4.6% just yesterday) but somewhat interesting that Schwab (SCHW) was crushed, down 10% yesterday, -7.74 to 67.43 as the company said it would reduce its size.  Jeanna Smialek (NYT) tweets: 

Donald Trump on Fed Chair Jay Powell’s term (which expires in 2026) in a @BW interview: “I would let him serve it out especially if I thought he was doing the right thing.”

–Waller at 9:30 this morning on Economic Outlook.  Beige Book this afternoon.  20-year auction.  Housing Starts and Industrial Production.

–Heavy volume in SFRU4/SFRZ4 futures spread yesterday, said to be initiated by a seller; settled unch’d at -40.5 (9496/9536.5).  This has been the low of the move; yesterday printed -43.  Both contracts saw open interest fall by about 29k.  Looking back to last December when the near 1-yr calendar was below -150, the first 3-m calendar had traded to -49.  Currently U4/U5 is -128.  Three-month calendar near -50 is hard to sustain… Also worth a mention is a decline in open interest in SFRU5 and Z5, -55k and -14k.  These contracts were nearly unchanged, 9624.0, unch and 9637.0 +0.5, while contracts a year forward were up 3 to 3.5.  I would characterize U5 and Z5 as profit-taking after a large move.           

Posted on July 17, 2024 at 5:10 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

Priming for an ease

July 16, 2024

–Goldman opined that the Fed has solid rationale for a July rate cut; Moody’s had also said something similar. (FOMC is July 31). With current EFFR at 5.33% or 9467, August Fed funds surged up to 9473 before falling back to 9468.5, an unchanged settlement.  FFV4 which captures the Sept FOMC meeting as well as July’s, ticked up to 9499 and settled 9494, up 1.5 on the day.  A 25 bp rate cut should put the new EFFR at 5.08% or 9492, so a print at 9499 begins to reflect significant concerns that a cut of 50 could occur.  A couple of days ago, SFRU4 9500c were sold at 3.0, yesterday settled 5.0 with SFRU4 +2 at 9496.5.

–Powell expressed greater confidence that inflation is moving in the right direction.  I’m not sure how much weight should be given to anecdotal evidence, but a friend who is involved with a private airport near Chicago said that business travel is rapidly slowing (thanks DK); last month’s fuel sales were the lowest in years.  WSJ has a headline: Evictions surge in major cities in the American Sunbelt.   BBG: Salesforce Cuts More Jobs in Latest Sign of Tech Austerity.

-Given a shift in sentiment toward near-term ease, the curve continues to steepen.  2y note fell 1 bp to 4.453% while tens rose 4.2 bps to 4.229%.  2/10 ended at a new high -22.4.  On June 27, just over 2 weeks ago, I marked SFRU5/SFRU8 at -47 (9587.5/9634.5).  Yesterday it settled -14.5 (9624/9638.5), a surge of over 30 bps. [notice that the price of SFRU8 barely changed].  In tens, there was a late buyer of 30k TY week-1 111.25p for 46.  Settled 48 vs 110-315,  Settlement date is 2-August, on which NFP will be released.  Seeing a small bounce in treasuries this morning with TYU4 111-09.    

–Kugler speaks today at 2:45 on ‘…Economic Measurement and Creative Solutions’.  I guess that just means changing the data!  Retail Sales as well, expected -0.3%, but ex-auto and gas +0.2%.  From the St Louis Fed website, I pulled the chart below on Retail Sales (nominal).  The recent slope of the curve is surprisingly flat given inflation levels of 4-6%.  According to my measurements, from April 2022, when the Fed had just started to hike, to May 2024 (last data on chart), total nominal retail sales were up just 3%…over TWO years.  Real Retail sales are soft.  But maybe we can just measure them differently.

Posted on July 16, 2024 at 5:46 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

Market reaction muted

July 15, 2024

–Market reaction to Trump assassination attempt is muted.  Republican Nat’l Convention begins today.  Powell interview with David Rubenstein, Chair of the Econ Club of Washington, DC, at 12:30.  Powell likely to emphasize slowing labor market.

–Curve steepened to new recent highs on Friday, with 2/10 +4 bps to -27.5 and 5/30 +1 to 29. Front SOFR calendars made new lows and deferred spreads made new highs as the reds, second year forward, led the rally, settling +3.75.  Greens +1.5, blues -1 and golds -2.  Both U4/Z4 and Z4/H5 3 month calendars settled at new lows, -39 and -37.5.  Near term easing is being priced somewhat forcefully, with SFRU4 to SFRH5  -76.5, over three-qtr pct in the span of six months.  

–Empire State Mfg today expected -6.0.  Treasury vol and VIX near the year’s lows.  TYU 111^ settled 1’40 from 1’44 Thursday. TY vol graph below.

Posted on July 15, 2024 at 5:31 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

Missed Me

July 14, 2024 – Weekly Comment

Post-debate a client had mentioned that the possibility that a Trump win could lead to a Fed HIKE.  I dismissed that idea, but after yesterday’s assassination attempt on Trump, perhaps that scenario deserves small odds. The hike part that is, the other is becoming more of a given.  Amazingly enough, I had just received one of those “your memories from this day” emails with this particular chart:

I don’t know that Small Business Optimism necessarily translates to economic dynamism. And, the initial plunge in 2020 was likely more associated with Covid than Biden.  However, since the middle of 2022, NFIB has never been able to get above 92; this year’s range is 88.5 to 91.5, well below Trump’s average of 104 to 105.

In the week that just passed, Powell leaned slightly dovish in his semi-annual Congressional testimony.  A monthly CPI print of -0.1 (3.0% yoy) supports the narrative that inflation is moving sustainably toward target. Focus has shifted to the labor market.  An ease for September is now fully priced, with October Fed Funds settling 9492.5 or 5.075% just more than 25 bps below the current EFFR of 5.33%. 

As the market gains confidence for near term easing, the back end of the curve steepened.  2/10, which hasn’t been positive since the middle of 2022 (the first hike was in March 2022) closed at -27 (4.462 / 4.187).  The ytd low was -50 just three weeks ago on June 25. There should be resistance at -16, a double top from Oct 2023 and January of this year.  A close above that level would suggest a target of +20 to +25.  I expect that stimulative measures associated with a Trump win would lead to more pressure on the back end of the curve.  On the other hand, the current administration has every incentive to juice the economy right NOW.  At the end of the month the Quarterly Refunding Announcement could again favor bills over coupons (as it did in Oct 2023, helping to ignite an ‘everything’ rally). The TGA is currently $722 billion.  From Q3 2022 to May 2023, it was drawn down from $690b to $48b.  I’d wager we will see a rapid drawdown in the next few months, pumping direct fiscal stimulus into the veins of the US economy. 

I am simply adding a couple of other charts of interest.  The first is the ‘Buffet indicator’ of total US Market Cap to GDP.  It’s hard to see on the chart, but it is now at a record 196%.

Second, here is a chart of the MOVE index, a measure of implied volatility in treasuries. It ended the week near the low of the year, as yields eased in the context of a steepening curve with inflation concerns receding. VIX similarly closed near the low of the year at 12.46; in fact it’s near the post-covid low.  Insurance is cheap.

UST 2Y459.7446.2-13.5
UST 5Y421.6411.1-10.5
UST 10Y426.9418.7-8.2
UST 30Y446.7440.1-6.6
GERM 2Y288.9282.3-6.6
GERM 10Y255.6249.6-6.0
JPN 20Y193.3187.0-6.3
CHINA 10Y227.3225.9-1.4
SOFR U4/U5-114.5-128.0-13.5
SOFR U5/U6-34.5-30.54.0
CRUDE (CLU4)82.2681.02-1.24

Posted on July 14, 2024 at 7:06 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

Cutting (talking rates here, not Joe)

July 12, 2024

–CPI hadn’t had a negative monthly print since covid, and yesterday the headline was -0.1% (yoy 3.0) with Core +0.1% (yoy 3.3).  Rate futures surged.  Curve steepened with the 2-yr down 12.5 bps to 4.505% and ten-yr down 9 bps to 4.191. 2/10 did not quite end at a new high (-31.4) but 5/30 did (+28.0).  October Fed Funds (FFV4) settled up 5.5 bps at 9492 or 5.08%, exactly pricing a 25 bp cut from the current EFFR of 5.33%.  SFRU4/SFRZ4 settled -37.5 (9493.5/9531) a new recent low.  Given that an ease at the Sept 18 FOMC is being fully priced, another 1 to 2 priced for SFRZ4 is somewhat aggressive.  However, it’s not out of the question to imagine a 50 bp cut if the data go pear-shaped.  The political situation in the US is still… shall we say… fluid.  Could that lead to a decline in business confidence?  

–SFRU4/SFRU5 settled -124.5. down 10.5 on the day! Almost exactly 5 eases.  That’s not, of course, a projection of an exact rate cut schedule, it’s just a range of various odds.  But the spread is still equal to 5 cuts!  And the KRE (regional bank ETF) was looking for just that sort of liquidity lifeline to get out from under the black cloud of commercial real estate.  KRE surged +4.2% to the highest level since January, while SPX was -0.9%.  Amazing rotation from Nasdaq to Russell with Nas Comp -1.95% and R2K +3.6%.   Big bank earnings today including JPM, C, WFC.

–Note that treasury vol ended at new recent lows.  I marked TYU4 111^ at 1’44 or 5.5% (from 5.7).  The Sept atm 110.5^ on Monday was 1’56 or 6%.  The drop in yields is not related to any type of ‘flight to quality’ panic, rather it’s just relief that funding rates will be coming down.  However, there is still a sense that forward rates are limited in terms of how low they can go.  Not an environment that sparks a mad grab for premium.  The peak contract on the SOFR curve has moved forward a couple of slots and is now SFRH7 at 9653, or around 3.5%.  The 5y yield ended at 4.123%.  A new catalyst could be lurking around the corner, but lower funding rates can paper over a lot of chronic problems, at least in the short term.

–PPI today expected 2.3% yoy with Core 2.5 from 2.3.

–Heavy trade yesterday, but one noticeable (pre-data) exit was the sale of >50k SFRZ4 9475p at 2.0.  On Wednesday there was a buyer of >50k SFRZ4 9525/9550cs for 6.5, and the contract magically vaulted above the lower strike yesterday, settling 9531 (+10.5) with open interest up 32k.  The call spread settled 8.75.  Nice one.

Posted on July 12, 2024 at 5:40 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

Inflation improving, job market weakening

July 11, 2024

–Powell says he needs better data to increase his confidence that inflation is sustainably moving towards the 2% goal.  Probably get it today (though he again said yesterday that the Fed’s focus is mostly on PCE prices).  CPI expected 0.1 with Core 0.2 m/m.  Yoy expected 3.1 from 3.3 with Core 3.4 from 3.4. He also again indicated that emphasis has shifted more towards labor market conditions.
Additional releases today:
Real Avg Weekly Earnings yoy 0.5% last
Jobless Claims 235k
30-year auction.

–SFRU4 options expire 13-Sept and the FOMC is 18-Sept.  SFRU4 settled 9487.5.  SFRM4, which still trades, settled 9464.75.  So Sept is close to reflecting an ease (spread of -22.75), as is FFV4 which settled 9486.5.  The big trades were in SFRZ4 options.  SFRX4 9525/9550/9575c fly bought for 3.5, 25k (expires after election and Nov FOMC), and SFRZ4 9525/9550cs 6.5 paid for 65k covered 9521 with 20d.  Both trades are new, and obviously work best as SFRZ trades above 9525.  The contract settled 9520.5 with an increase in open interest of 29k.  SFRU4/Z4 three-month spread settled -33.  SFRZ4 options expire 13-Dec and the FOMC meetings are 7-Nov and 18-Dec.  Eases at the last three meetings of the year, Sept, Nov, and Dec, would likely result in the 9525/9550c spread gaining full value. 

–Another interesting curve trade, +10k SFRH5 9600c/-10k 0QH5 9700c for flat.  Both calls settled 16.0, but the front is just 47 otm (9553) while 0QH is 67 otm as SFRH6 settled 9533.  This trade works best on aggressive, forced easing.  The roll is a headwind, as Z4 9600c settled 4.25 and 0QZ 9700c settled 9.25. (9520.5/9616.5).


This is a rather interesting post with link below (thanks TMS):

chart ranks all $SPX 1m realized vol outcomes from high to low since 1990. At 5.4% right now, we are in the 1st percentile of outcomes. 1m realized vol on $NVDA and $AAPL are 9x and 6x, respectively, the same for the SPX. That is unheard of.
Let’s consider another month, Dec’17, when SPX realized vol was 5.5. The two largest stocks in the index were AAPL and $MSFT. What were their respective ratios of realized vol to the SPX in Dec’17?  AAPL was 2.7x the SPX. MSFT was 3.6x the SPX.
There are 100’s of blns of $ of market cap “coming and going” in giant names, especially NVDA. A 3T company moving on a 50 vol is not healthy. There’s rampant speculation that is overwhelming the option market’s capacity to absorb gamma risk. The extent to which these meaningful vols on the single stock level do not translate to index vol (NVDA 50, SPX 5), is very unusual and likely not sustainable. Broken record statement: “The very same conditions that cause stocks to become more volatile also cause them to become more correlated at the same time”

Of course, this vol analysis sort of reflects the same thing that everyone already knows: the market is extremely dependent on just a few names.  But the gamma risk associated with the dispersion trade may be underappreciated.

Posted on July 11, 2024 at 5:28 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

National Debt Relief

July 10, 2024

–I have to start with a story about the yawning gap between asset prices.  No, I am not talking about Nasdaq vs Russell, but this example is stark as well. reports that a 41 story office tower in NYC, 180 Maiden Lane, was bought in a short sale for $297m, by Carlo Bellini’s real estate firm 99c.  Last trade in 2015 for $470m, partially financed by Blackstone with a $248m loan.  Here’s the rich part: it’s 68% occupied, with one anchor tenant being National Debt Relief.  At least we can be sure THAT business will remain strong….
(Blackstone’s relationship with Nat’l Debt Relief goes from landlord to client!)

The other story is on BBG:  “A penthouse at Aman New York (Crown Building) has sold for $135 million, making it the most expensive home purchased in Manhattan this year.”  The five-story unfinished space went for $10k sq/ft. “Priciest deal since 2022”.

Crown Building (Manhattan) - Wikipedia

–Powell in front of Senate Banking yesterday.  He repeated that the Fed needs to see more good data on inflation before cutting.  Could it come tomorrow with CPI?  Monthly figures expected 0.1% with Core 0.2%.  Yoy expected 3.1% from 3.3%.  Overall, Powell’s tone was slightly dovish, with emphasis on the slowdown in labor markets; several Senators noted the outsized amount of government hiring in the last payroll data.

–There were several questions/comments about the prohibitive cost of housing, related to high mortgage rates.  I thought it would have been appropriate for Powell to mention the rapid increases in insurance and property taxes; if he did, I missed it.

–Semi-annual testimony continues today in front of the House.  Ten-year auction as well, which follows a solid 3-yr yesterday.  Yields rose a few bps across the curve, with tens +3 to 4.298%.  Worth a note is that several of the deferred SOFR calendars are edging to new recent highs.  For example, SFRM26/SFRM27 settled -7.5 (9632/9639.5).  The past month’s range has been -15.5 to -8.5.  SFRM7 is currently the highest point (lowest yield) on the SOFR strip with a yield of 3.605%.  

–Several large SOFR option trades yesterday (not covering all, just a few).
New buyer 35k SFRU4 9500/9506.25cs for 0.5 (SFRU4 settled 9487)
New buyer 10k SFRU5 9575/9525p 1×2 vs 9600 and 9599 for 2 bp credit.  Settled -1.75 vs 9601.
Exit put buys
+50k 0QU4 9500p for 1.0 (100 bps out of the money with 66 dte).
+30k 2QZ4 9550p for 6.5, covered 9636.5, 15 delta. Underlying SFRZ6 settled 9638.

Posted on July 10, 2024 at 5:33 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

Powell today

July 9, 2024

–NFIB Small Business Confidence expected 90.2. The lowest print of the year was in March, at 88.5.  That has also been the lowest since 2013; there’s been almost no bounce.  From the last report: “Main Street remains pessimistic about the economy for the balance of the year,”

–Powell testifies today in front of Senate Banking Committee at 10:00, tomorrow at the House.
I’m just glad Bob Menendez is still sitting on the committee, because he and I share an interest in the value of gold and maybe he can ask Powell a few questions about it.  Of course, Menendez got his gold bars as a bribe… [if there’s anyone in politics who should step down, it’s this guy]
Picture of gold bars

–Former Dallas Fed President Kaplan on CNBC yesterday: “I think risk management will dictate a rate cut in September”…but he characterized it as more of game-day decision.  In any case, FFV4 settled 9487 or 5.13%, -1 on the day.  A Fed cut would bring EFFR to 5.08%, so odds for an ease in Sept are currently around 80%.  Rates trading was subdued yesterday, with little net change.  Near SOFR contracts were -2 but everything else showed net change of -1.5 to 0, and that includes the treasury curve.

–Three year auction today followed by 10s and 30s Wednesday and Thursday.

–Michigan’s Whitmer appears to have dropped out of the Dem presidential race.  Biden’s bravado is buying time to whittle down the potential list of replacements to one or two that the establishment can support.  Illinois Governor Pritzker is trying to buy his way onto that list, though his policies have caused residents to flee.  “Illinois lost 83839 residents who moved to other states, one of the highest rates in the US, driving a 10th consecutive year of population decline.”  Who lost more than Illinois?  CA, and Newsom is also running.  If either one of these guys wins, the immigration problem will be solved, as they are experts at driving people out of their jurisdictions.

Chicago shootings: At least 103 shot, 19 fatally, in citywide holiday weekend gun violence, CPD says

Posted on July 9, 2024 at 5:49 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

Soft employment sparks new low in SFRU4/SFRU5

July 8, 2024

–Though the NFP print was higher than expected at 206k, the unemployment rate ticked up to 4.1% (highest since Nov 2021) and private payrolls were just 136k (only 4 lower prints in past 3.5 years).  Average Hourly Earnings yoy were 3.9%.  Yields fell, with tens down 7.4 bps to 4.271%.  Both twos and fives sank 9.2 bps to 4.597 and 4.216.  New high in 5/30 to 25.1 bps (upside breakout).  With SFRU4 increasingly constrained as it nears the IMM date (up only 2 bps to 9489) near calendar spreads made new lows.  SFRU4/U5 plunged 11.5 bps to a new low of -114.5 (9489/9603.5). U5 jumped 13.5 bps, largest change on the strip.  SFRU4/SFRZ4 also made a new low at -34 (9489/9523).  FFQ4/FFQ5 settled -122.5 (9469/9591.5)…nearly five eases priced over next year.  

–On the SOFR strip, the red/gold pack spread closed at -9.375, the least inverted on a rolling basis since March.  I use the old definition, with U5 as the front red contract and U8 as the first gold.  Using average prices, the red pack (2nd year) is 9620.875 and the gold pack (5th year) is 9630.25.  In a more normal world, that spread is positive…we’re getting there.

–Today brings Consumer Credit for May, expected +$10b.  Auctions kick off tomorrow, starting with the 3y, and Powell begins Congressional semi-annual testimony before the Senate Banking Committee.  This morning bonds have pulled back a bit, perhaps as a concession to auction supply.  Precious metals have likewise eased from strong rallies last week.  

Posted on July 8, 2024 at 5:28 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options