Dots are rarely right, but they make markets move
March 19, 2025
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–Front SOFR contracts continue to trade heavy in front of today’s FOMC, with SFRM5 and U5 both settling -1.5 at 9587 and 9608, even as every contract one year out and further closed positive on the day. The red SOFR pack (2nd year) +2.75. Greens (3rd) +3.875. Two-yr treasury yield -1.2 bps at 4.038% and tens down 2.3 bps at 4.279%. At 9587, SFRM5 is just 20 bps lower in yield than EFFR (4.33%). The market is paring back ease expectations, according to BBG.
–BBG’s Anna Wong writes this:
Fed staff views on the impact of tariffs have evolved since 2018. During the first Trump administration, staff believed tariffs on intermediate goods – the majority of US imports – would be deflationary. New research shows Fed staff now believe tariffs on intermediate goods will have a persistent inflationary impact on the PCE deflator.
The latest research implies Fed staff could boost their PCE inflation outlook by about 0.5 percentage point for this year, and 0.2 ppt for both 2026 and 2027, at this meeting or a later one.
–Today, we get a fresh round of Fed dots. The clip above tends to dovetail with surveys on inflation expectations which have recently jumped. However, market measures aren’t saying the same thing, with the ten-year breakeven at a recent low of 230 bps. Here’s how the Fed’s estimates changed from September to December (the last SEP). Inflation estimates for end-of-2025 were marked higher, and so was the FF target.
(End-of-2025)
PCE Inflation 2.1 to 2.5%
Core PCE Infl 2.1 to 2.5%
Fed Funds 3.4 to 3.9%
GDP 2.0 to 2.1%
The inflation dots will, in my opinion, either remain the same or come down by 1 tenth. I am not buying into Anna Wong’s piece.
The FF estimate will likely reflect one more ease, from 3.9% (a target of 3.75-4%) to 3.6% (a target of 3.5 to 3.75%).
GDP will likely be revised lower. Atlanta Fed’s GDP Now for Q1 is currently -1.8%. We’re nearly at the end of Q1, and Atlanta is pretty accurate.
–I haven’t read other analyses of the dot plot. It seems to me that if the Fed wants to reassure the market that inflation (and expectations) are not going up, then inflation estimates will definitely not go up (as Anna Wong’s piece suggests). It’s my belief that the Fed is now shifting emphasis to jobs rather than inflation. If we were to get inflation projections to 2.4% and FF 3.625% middle, it would imply neutral at 1.25%. Low in my opinion, but not completely out of the ballpark. If inflation estimates go UP by a few tenths, an already vulnerable stock market will NOT like it. There are a lot of anecdotal reports about economic deterioration, like this from @Barchart yesterday:
“42% of mortgage refinance applications are being rejected, the highest rate in AT LEAST the last 12 years”
–There was a flurry of TY vol buying midday, which suggests to me that vols will hold here:
TYM5 108.0/113.0 strangle vs 110-19 with 5 delta, 45 paid for 9k (settled 46, 30c and 16p vs 110-255)
TYM5 107.5/113.5 strangle vs 110-185 with 5d, 35 paid 15k (settled 36, 24c and 12p)
TYK5 112c 25 paid vs 110-18, 28d for 5k.
All appear new. Perhaps a hedge for unexpected geopol events.
Front end pressure
March 18, 2025
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–Retail sales a bit soft yesterday and Empire State Mfg sank to -20.0 vs -1.9 expected, but front end yields pushed higher. Two-yr up 3.3 bps to 4.05%, while tens were nearly unch’d, with the yield down less than 1 bp to 4.302%. TYM5 settled down 1/32 at 110-19+, while USM5 was +7/32 to 116-31. On the SOFR strip, SFRU5 weakest, -5.0 to 9609.5, U6 -2.5 to 9639.0 (peak contract), U7 -1.5 to 9632.5 and U8 -0.5 to 9620.5.
–Geopolitical issues dominate. Israel/Hamas truce crumbled, with Israel striking, fearing an imminent ground invasion. German spending vote at 2:30 Berlin time (9:30 NY). EUR continues to press higher, from sub-104 at the start of March to 1.0947 currently. Trump/Putin call later today.
–There was a blurb on FT about the Indonesian market getting crushed. Symbol on BBG is JCI (Jakarta Composite). This market has been in a downtrend since Q4, and spiked to a new low today. Cautionary note is that there have been a series of countertrend rallies, each followed by a sharp break to new lows. Today’s was especially vicious, more than 7% drop to today’s low from yesterday’s close.
–NVDA’s GTC (AI) conference today will feature a presentation by Jensen Huang.
–FFK5 settled 9572. A 25 bp cut at the May 7 FOMC, which I expect, would lead to a settle near 9586.5, while no change would be 9567 (at the current EFFR of 4.33%).
–From the NY Fed’s Survey of Conditions:
The share of discouraged borrowers, defined as respondents reporting that they did not apply for any credit because they did not think they would get approved (despite reporting a need for credit), reached 8.5 percent, the highest level since the start of the survey in October 2013.
If you’re long gold, you’re in a deflating world
March 17, 2025
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–Front end hit Friday as U of Mich inflation expectations showed an unexpected jump. At the end of 2024, year-ahead expectations were just 2.6%, low of the cycle. Just four months later 4.9% (vs 4.3 estimate), nearing the high of 2022 which was 5.4%. Market measures like breakevens (treasury vs inflation-indexed yields) are still near recent lows, for example, on Friday I marked the 10y at 2.31%. Which will ultimately be more accurate? I would favor market measures, but clearly the cost of living is up. In any case, the two-year yield on Friday rose 6.8 bps to 4.017%. Weakest SOFR contracts were H26 and M26, both -8.5 at 9636.6 and 96405. 10y yield up just 3.4 bps to 4.31%. Curve flattened.
–March SOFR options rolled off on Friday, so I am using June’25 as front month (first slot). While SFRH5/H6 was -66 on Friday, SFRM5/M6 one-yr calendar is -47.5 (9593/9641.5). Red SOFR contracts are all around 3.6%. So while EFFR at 4.33% and 10y yield at 4.31% are nearly equal, forward contracts indicate positive carry. Gundlach often says the Fed follows the 2y yield. The FOMC announcement and press conference is Wednesday, and no change in rates is expected, but clearly the market is pricing forward eases. Current EFFR is 4.33% and SFRM5 at 9593.0 of 4.07% is almost exactly one-quarter percent lower.
–Over the weekend, the US bombed Houthi targets in Yemen, sending a message that shipping disruptions won’t be tolerated. Additionally, Bessent was interviewed and said he’s unconcerned about the stock market pullback and that he can’t guarantee the US won’t go into recession. He cited emergency type gov’t stimulus from which the economy must be weaned. As of this writing stocks have retreated from Friday’s rally, and oil is higher. I’ve attached a chart of oil priced in gold, and there’s outright DE-flation when measured that way….
–The sharp drop in SPX is mirrored by the plunge in SFRH5/H6 calendar, as shown on the chart below. Gov’t largesse has supported stocks, higher stocks support the economy. When those two reverse, forward SOFR contracts rally as the market prices in compensating Fed cuts. (ESH5 in green, SFRH5-SFRH6 in white).
Canary
March 16, 2025 -Weekly Comment
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The inset is a painting ‘The Goldfinch’ by Carel Fabritius in 1654. It features in the 2013 Donna Tartt Pulitzer Prize winning novel of the same name. In the book, the young protagonist Theo Decker is at New York’s Metropolitan Museum of Art with his mother when a bomb explodes. His mother is killed. In the rubble he takes the painting. Throughout his youth to early adulthood, he conceals the artwork, but it is stolen from him by a friend involved with nefarious associates. From a summary, “…the painting has since been used as collateral by criminals and drug dealers.”
It’s not a canary. But for the purposes of this note, it might as well be.
An article in the Financial Times last week reports that lenders are issuing margin calls to borrowers who have used fine art as collateral for loans, as the value of art has declined. The article estimates the total amount of the market at around $40 billion, secured by art worth perhaps double that. Collectors sometimes borrow to create liquidity. Obviously, this is a tiny sliver of global markets. However, the same dynamics run through the world’s financial system. It gives some degree of pause when Bessent talks about monetizing the Federal Gov’t balance sheet…
When one looks at total Household Sector net worth (published by the Fed last week, quarterly report, chart below) it reveals current NW of $169T: Assets 190t and liabilities 20.8t. Staggering growth since Q1 2020, when Assets were 128t, Liabilities $16.6t and NW $111t. Net worth has exploded by about 45% in nearly 5 years, in the amount of $58t. I listened to a recent Thoughtful Money podcast with Cem Karsan, and he refers to this increase as an increase in ‘collateral’. But the numbers don’t really bear that out. Household liabilities aren’t increasing anywhere near the same rate. Except for one borrower of course. Uncle Sam.
The same Z.1 Fed report shows Federal Gov’t Debt at $19.5t in Q1 2020 vs $31.6t in Q4 2024, an increase of 62%. Maybe that’s a fabulous multiplier. Increase Fed’l debt by $12.1t to get over 4x that in HH net worth. (Total Business debt from $18.69t to $21.55, up 15%).
Of course, it comes at a price when one steals from or borrows against the future. Five years from the depth of covid is a good time to reflect. For example, the Fed’s five-year policy review will be released in August. Last time it resulted in the ill-fated FAIT (Flexible Avg Inflation Targeting).
In March of 2020 the five-year note yield was at the then historic low of around 40 bps. By August it had reached the all-time low of 19 bps, right at the time of FAIT. The all-time low in tens, also in August, was 51 bps. We’re right around the five-year anniversary. So, if a corporate had ‘termed-out’ all debt at the 40 bp low in March 2020, it’s now running about 3.75% higher. Obviously, corporate finance is a dynamic process, and everyone knows rates soared. The point is that it can take a fairly long period for pressures to build. Of course, changes can also be rapid, as evidenced by last week’s plunge in Consumer Sentiment which printed 57.9, lowest since late 2022 and down from 74 at year’s end. (Conference Board’s Consumer Confidence data reflects a similar drop). One brief note, in late 2022 when confidence measures were floundering as the Fed hiked, stocks were selling off. SPX ultimately bottomed at 3491, which was a 50% retracement of the covid low of 2192 to the start of 2022 high at 4819. If SPX had a similar 50% pullback from the 2022 low to this year’s high, it would be 4813 (current 5639).
Retail Sales are released Monday. Many anecdotal reports (WSJ article, ‘Consumers and Businesses Send Distress Signal as Econ Fear Sets In’) support the idea of lessened confidence. Retail shares have been hammered. XRT (the retailer ETF) is off 17.3% since the end of January. We’ll see if Retail Sales data can hold.
The big event of the week is the FOMC press conference on Wednesday. No change in rates is expected, but I think Powell will set the stage for a May 7 cut. As I mentioned last week, the Fed has subtly indicated that the labor mandate is now more important than inflation. While the U of Mich Inflation expectations data soared in last week’s release (1y was 4.3 last and expected, actual 4.9%) the 5 and 10 year breakevens are at the lows for this calendar year. 5y is 2.53% and 10y is 2.31%. The next PCE price data is 28-March. Also likely is some discussion (announcement?) regarding the end of QT.
I enjoyed reading The Goldfinch, though some critics panned it. Everything turned out in the end. It will this time too. Eventually.
OTHER THOUGHTS, TRADES
Implied vol was pressured in treasuries, especially near the end of the week. MOVE index went from 104.41 to 101.01. On Friday, March 7, TYM5 settled 110-185 and TYM 110.5^ settled 2’39. On Friday, TYM5 settled 110-205 and TYM 110.5^ settled 2’29.
On Wednesday, BBG reported that ‘Brevan Howard Slashes Trader’s Risk-Taking as Losses Exceed 5%’. I have to believe that some large positions have been recently jettisoned across markets. For example, the pop in TY following lower than expected CPI was immediately rejected. On the week, treasury yields showed little net change (table below), even as gold posted a new all-time high, ending the week at 2985 (GCJ5 3301.10s).
The lowest quarterly SOFR contract is SFRM5, now the first quarterly slot, which settled 9593.0 from 9596.5 the previous Friday. The peak contract is SFRU6 at 9641.5, down just 1 bp on the week. Near contracts were sold on higher than expected inflation expectations, but again, net changes were small.
I believe Powell will signal a May cut (dependent on inflation data). The meeting is May 7. By early June I think another cut will be priced with near certainty for the June 18 FOMC.
| 3/7/2025 | 3/14/2025 | chg | ||
| UST 2Y | 400.0 | 401.7 | 1.7 | |
| UST 5Y | 409.4 | 408.4 | -1.0 | |
| UST 10Y | 432.2 | 431.0 | -1.2 | |
| UST 30Y | 461.7 | 461.5 | -0.2 | |
| GERM 2Y | 224.7 | 218.7 | -6.0 | |
| GERM 10Y | 283.6 | 287.4 | 3.8 | |
| JPN 20Y | 223.1 | 226.4 | 3.3 | |
| CHINA 10Y | 184.5 | 185.1 | 0.6 | |
| SOFR M5/M6 | -46.5 | -47.5 | -1.0 | |
| SOFR M6/M7 | 9.5 | 4.0 | -5.5 | |
| SOFR M7/M8 | 12.5 | 12.5 | 0.0 | |
| EUR | 108.34 | 108.79 | 0.45 | |
| CRUDE (CLK5) | 66.75 | 66.91 | 0.16 | |
| SPX | 5770.20 | 5638.94 | -131.26 | -2.3% |
| VIX | 23.37 | 21.77 | -1.60 | |
| MOVE | 104.41 | 101.01 | -3.40 | |
https://x.com/ftfinancenews/status/1900600512602398825
Collectors reluctant to sell at low prices used art-backed loans as “a way to create liquidity out of something that’s just sitting there”, said Nishi Somaiya, global head of private banking, lending and deposits at Goldman Sachs.
When credit turns
March 14, 2025
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–New all-time high in gold yesterday and this morning GCJ5 is up over $17/oz just above 3008. GCJ5 settled 2991.30, +44.50. This, despite Schumer’s reversal, which for now, averts the chances of a government shutdown.
–Yields fell yesterday as equities continued to decline (SPX -1.4%). Tens down 3.4 bps to 4.276%. Ten-yr has been holding right around the Fed Effective rate of 4.33%. The 2y fell 4.6 bps to 3.95%. Ten year breakeven notched a slight new low at 231 bps. Today, U of Mich releases inflation expectations with 1-yr at 4.3%, same as last, and 5-10yr expected 3.4% from 3.5% last.
–Not much to report with respect to SOFR contracts. SFRZ4 to SFRZ8 rose 4 to 5.5 bps. All contracts in the two years from Z5 to Z7 are between 9636 (Z5) and 9649.5 (U6), consistent with a forward FF range of 3.5 to 3.75%. Current is 4.25 to 4.5%. March SOFR options expire today.
–Fed’s Z.1 report showed Household net worth rose $164 billion in Q4. In Q3 it was up $4.8 trillion! Q1 not looking good…
–A couple of weeks ago I noted some decent size open interest in puts on HYG, a high-yield etf. From the chart below, probably would have been better on JNK as that has broken down more decisively. One of the ‘financial conditions’ parameters reviewed by the Fed is credit spreads. While still low, these spreads have perked up a bit. It seems to me that the growth in private credit came after the regional bank meltdown in 2023. Silicon Valley Bank failed almost exactly two years ago. I don’t know a lot about the regional banking crisis, but I wouldn’t characterize the problem as bad loans, but perhaps loans provided too cheaply, as if the low rate regime would last forever. Depositors pulled funding like a rug, and it was game-over. Private credit and equity investing is supposedly a way to juice returns, but in this case I don’t think the funding can easily be pulled, nor do I think it’s appropriately marked-to-market. It can, however, completely dry up. Slower deterioration.
Weaker than expected CPI provides no comfort for bonds
March 13, 2025
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–CPI was a little better than expected with monthly readings of 0.2 both headline and Core. Headline yoy was 2.8 vs expected 3.0 and 3.1 on Core vs 3.2. PPI today.
–However, bonds traded weaker on the day, partially due to continued supply. Ten year auction went well with a yield of 4.31%. Overall yields ended higher with tens up 2.4 bps and 30s up 2.6 at 4.626%. 30 year auction size today is $22b.
–Front end was weakest part of the market with 2y +5.8 to 3.995%. On the SOFR strip SFRZ5, H6 and M6 were all -7 at 9632, 9640.5 and 9644.0. With just a week to go until FOMC, March is priced for steady policy. while the May 7 meeting is priced at odds of about 36% for a 25 bp cut (FFK5 settled 9573). They’re going to cut at the May meeting in my opinion.
–Stocks a bit lower as of this writing as Schumer closed the door on a continuing resolution to keep the gov’t open. Budget deficit released yesterday was $307 billion for month of February and record $1.15 trillion for the first 5 months of the fiscal year. A $300 billion/month deficit at 4% adds $1 billion per month to the interest rate bill. April Gold is 2956 this morning, up 9.2 and threatening last month’s highs. Retailers continue to trade poorly, after making new highs in Feb, WMT is down 19%, COST is down 14% and TGT, which has been in a prolonged slide is 24% off the high made in Feb.
–Implied vol hammered in rate futures as CPI provided little drama. As an example, TYJ 111^ settled 1’12 Tuesday, with TYM 111^ at 2’44. Yesterday: TYJ 110.75^ 0’59 and TYM 110.5^ 2’33.
SFRH5 opts rolling off Friday. Where will SFRM5 be on 13-June opt expiration
March 12, 2025
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–Despite equity market volatility yields rose yesterday with tens up 7.5 bps to 4.286%. Today brings CPI and 10-yr auction of $39b. CPI expected 0.3 headline and Core with yoy 2.9 (from 3.0) and Core 3.2 (3.3). In February, the ten-yr breakeven (10y yld minus inflation-indexed 10y) hit a high of 247 bps. Now it’s 232. The low in 2024 came close to the Fed’s target at 203. My guess is that it will settle in around 220-225. The US market does not fear inflation. Even if crude oil bounces back near 70, it will be below year-ago levels.
–Ten-yr German bund yield is 2.90 this morning, closing in on the high-water mark of 2.97 in 2023. Since November the bund yield has surged nearly 90 bps.
–(Fortune) Goldman’s GDP projection for 2025 now sits at 1.7%, down from 2.4% at the start of the year. [below consensus]
“Instead, the reason for the downgrade is that our trade policy assumptions have become considerably more adverse, and the administration is managing expectations towards tariff-induced near-term economic weakness,” [Jan Hatzius] wrote Tuesday in a note to clients.
–March quarterly SOFR and midcurves expire Friday. SFRH5 settled 9571 yesterday or 4.29% against EFFR of 4.33%. SFRH6 settled 9647.5 for a spread of -76.5. With March rolling off, it’s worth looking at where M5 will ultimately settle.
–My base case is that the Fed cuts 25 at both the May and June meetings. SFRM5 options settle 13-June, FOMC is 18-June. The advance GDP report for Q1 comes out April 30, and it’s likely to be negative. Data probably isn’t capturing the extent of government cuts. Current EFFR is 4.33 and SOFRRATE is 4.33 to 4.37. A cut of 50 by June is 3.83 in EFFR. Next meeting is July 30, and will likely price some odds of another ease. SFRM5 settled 9599 yesterday. My peg for final settle is 9620 to 9623 (3.80 to 3.77). This is NOT a recommendation, but SFRM5 9600/9625/9643.75 broken call fly settled 3.5. Even if the contract were to settle above the top strike, fly would settle 6.25. so there would be a little profit.
All about stocks
March 11, 2025
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–SPX fell 2.7% and Nasdaq Comp fell 4.0%. Decline from the highs is of greater magnitude than seen last August (yen-carry scare). Signs of a short-term bounce this morning.
–FFN5 settled 9600.5 (+6.0 on the day) or just under 4% vs current EFFR of 4.33%. FOMCs next week (nothing expected) then May 7 and June 18. Possible eases at both meetings? The Fed has signaled a bias toward labor conditions rather than inflation; today JOLTS is released, expected 7600k from 7600k last. Low last year was 7372. Auctions of 3s, 10s and 30s kick off today with the three-yr.
–Ten-yr yield sank 10.4 bps yesterday to 4.211%. Two-yr yield fell 10.6 to 3.894%. However, the 30y yield fell only 7.7; new recent high in 5/30 spread at 56.6, up 4.5 on the day. Near SOFR calendars made new lows of course, with SFRH5/H6 at -81.5 (9572, +1.5 & 9653.5, +13.5). Like FFN5, SFRM5 is just under 4% at 9603.0. Strongest contract on the SOFR strip is also the peak, SFRM6 at 9657, up 14. Buyer of 40k 0QM5 9750/9800cs for 2.75, settled 3.0.
–Unsurprisingly, rate vol jumped. The seller Friday of 50k SFRU5 9625c at 24 covered 9625.5 to 9626 (straddle = 47.5 to 47) was just a little early; SFRU5 9625^ settled 49.5. I marked TYJ5 111.25^ at 1’15s or 8.0 and TYM5 111.0^ at 2’47 or 6.8. New highs. However, by way of comparison, BBG one-month vol shows a high of 7.8 in one-month vol on August 5 (yen-carry), and 7.2 now. VIX around 27.
–CPI tomorrow expected 0.3 headline and core. YOY 2.9 and 3.2 Core.
Stocks start the week weak
March 10, 2025
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–Friday’s payroll data was about as expected with NFP 151k and the Unemployment rate up 1/10th to 4.1%. However, U-6 jumped 0.5 to 8.0%. Then year yield rose 2.9 bps to 4.315%.
–JOLTS tomorrow expected 7665k from 7600k last. The high in 2022 which preceded peak CPI of 9.1 by a few months was 12182k, low last year 7372k. FOMC is a week from Wednesday, so thankfully we’re in the blackout period. However, President Trump does, on occasion, make an unexpected comment that throws the market for a loop.
–US auctions 3s, 10s and 30s starting tomorrow. As of now, equity market weakness seems to be supporting fixed income. As of this writing on Monday morning, ESH is -66 at 5710.
–Truflation index down to 1.4%. Perhaps there’s an ‘overshoot/undershoot’ aspect to the data, but the high in June of 2022 was 11.6%. This as we await CPI on Wednesday, expected 0.3, with yoy 2.9 (from 3.0) and Core 3.2 (from 3.3).
–Large trade Friday appears to be exit seller of ~50k SFRU5 9625c at 24 covered 9525.5 to 26, or synthetically down to 47 in the straddle. SFRU5 9625^ settled 48.0. Friday is the last day for MARCH sofr options. Next week September will be trading in the second quarterly slot. ATM March midcurve straddles are all 14.5 to 15.
DETOX
March 9, 2025 – Weekly Comment
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They tried to make me go to rehab, but I said “No, no, no”
Yes I’ve been black, but when I come back, you’ll know, know, know
–Amy Winehouse – Rehab
“…the market and the economy have just become hooked; we’ve been addicted to this government spending. And there’s going to be a detox period.”
–Treasury Sec’y Scott Bessent on CNBC Squawk box interview.
The lines just prior to the bit above: “…could we be seeing this economy that we inherited, starting to roll a bit? Sure. There’s going to be a natural adjustment as we move away from public spending to private spending”. Bessent and others have said the process will not be linear.
We’re going into rehab.
Momentous policy shifts across the globe necessarily come with massive capital shifts.
A recap of some of the week’s big news:
While it doesn’t appear as if government lay-offs have yet been captured in payroll data, “U-6* [under-employment rate] up 0.5% to 8%, largest one-month increase (excluding Covid) since 2009 and 2001 recessions; now 1.5% off low.” (Chris Long on LinkedIn). Headline Unemployment rate was up 0.1 to 4.1%. Both Powell and Bowman indicated a subtle shift in the Fed’s focus to the labor side of the dual mandate, rather than inflation.
SPX is down just over 6% from the high, and fell 3.1% this week. NVDA alone has shed nearly $1 trillion in market cap from the high in January. NDX is down 8.9% from the high. Are retailers foreshadowing a ‘reverse wealth effect’? COST -8% this week. TGT -7.3%. BBY -11.7%.
Atlanta Fed’s GDP Now for Q1 currently stands at -2.4%. Go back to Feb 19 and just change the sign, it was +2.3% just over two weeks ago!
The economy is slowing under the haze of uncertainty. Huge move in German bunds this week as Merz promises to do ‘whatever it takes’ to ramp up defense spending. Ten-year yield in Germany exploded by 43 bps to 2.836% even as the ECB (as expected) cut rates to 2.50%. EUR surged from 1.0378 last Friday to 1.0874. As an aside, @GlobalMktObserv shows that German GDP share of the global economy has halved in the past three decades, from 8.4% in 1990’s to an all-time low of 4.3% now. Hand-in-hand with Greta Thunberg and the green energy agenda. This week’s pivot has to be good for uranium/nuclear. Defense mfg requires energy apart from intermittent winds.
From my note last week: Chart above is EUR/JPY. I can’t help but feel that a large downside move is near. Then I wonder if perhaps Europe makes a U-turn… Perhaps huge investments in defense/tech are around the corner. Could Europe’s manufacturing base become rejuvenated? [EURJPY rallied from 156.27 to 160.36]
One other thing worth mention is a BBG podcast with Dawn Fitzpatrick, Soros CIO. The title is: ‘Investors Underestimate Trump’s Tolerance for Stock Selloff’. A couple of interesting notes: She says, “…what you can’t control is consumer confidence and corporate confidence, and I think that is what is falling off a cliff right now.” No mincing words there. She also says, because of US and European bond issuance, “…one of the things we might see, and this isn’t going to happen tomorrow, but I think it could happen in the next 12 to 24 months is a failed auction out of Europe.” Cites UK and France as most vulnerable. Other insightful comments on private equity and credit near the end. Well worth a watch. 17 minutes.
https://www.youtube.com/watch?v=Qv4qPPj5wI4
In the US rates popped from the year’s lows made last week. The curve steepened. 2s nearly unch’d at 4.00%, 5s +6.8 bps to 4.094%, 10s +8.5 to 4.315% and 30s +10.2 to 4.615%.
Rolling SOFR red/gold pack spread (2nd to 5th years) posted a new high for this year at 31.625 bps. High of the past three years was just under 41 bps in the wake of the Sept FOMC cut of 50 bps. This spread reflects renewed easing expectations – If the Fed is going to cut, short rates will fall faster than long rates. I suspect tens will chop around 4.20 to 4.40 for the next week or so. Ended Friday 4.315%.
This week on Thursday (13th) the Fed releases Z.1 flow of funds report for Q4. The financial press focuses on Household Net Worth. SPX on 9/30/24 was 5762. On Dec 31 it was 5882, up 2%. Interestingly we’re right back to end-of-Q3 level with Friday’s close 5770. Real Estate is always marked higher, though properties for sale in markets like Las Vegas and Nashville are exploding. From Melody Wright: “These 7 [metros] had negative [price] YOY sales per Redfin and an increase in inventory of greater than 20% YOY: Las Vegas, Tucson, Sacramento, Nashville, Austin, Dallas, Los Angeles”
On the week SFRM5 +1 at 9596.5. M6 -0.5 at 9643.0, M7 -8.0 at 9633.5, M8 -12 at 9621.0. Back end responding to German spillover, supply (US auctions 3s, 10s, 30s this week). Remember the guy that kept buying SFRZ5 9700c vs 0QZ5 9750cs for 2 to 3? Settles 15.0 vs 9632.5 and 11.5 vs 9640.5. But…it’s likely the same trader that had rolled his Z5 9700c to U5 9650c. Those settled 14.75. I think he mostly took in 0.5 on the U5/Z5 switch. U5 9650c have 250k open. 0QZ 9750c have 93k open. Largest trade Friday was a sale of over 50k SFRU5 9625c at 24.0 covered 9525.5 to 9526.0, 50d. Settled 21.25 vs 9619.5. Exit trade, OI down 43k in calls and 15k in futures.
CPI on Wednesday expected 2.9% yoy vs 3.0 last. Core expected 3.2% from 3.3%. Remember, the Fed is shifting focus from inflation to labor. Tuesday’s JOLTS might be just as important as CPI (expected 7665k from 7600k). Low last year 7372k. I wouldn’t be surprised if it is lower than that.
OTHER THOUGHTS, TRADES
My bias is to buy red sofr contracts on pullbacks. That opportunity could come this week. SFRM6 (9643) and U6 (9642.5) have been peak contracts on the SOFR strip and had powerful rallies since mid-February. For example U6 went from 9603 on 2/18 to 9649.5 on March 4. Could easily see a pullback towards 9620 to 25.
Looking at broken flies in Short July midcurves. March FOMC is almost certain to be a hold. Next meetings are May 7, June 18, July 30 and Sept 17. July midcurves expire July 11, SFRU6 underlying. July FF, FFN5, is close to being a ‘clean’ month. 31 days in July, FOMC is 30-July. The contract settled 9594.5 or 4.055%, reflecting one 25 bp ease. Current EFFR is 4.33% (and FFH5 settled exactly at 9567.0). One cut is 4.08% or 9592.0.
0QN6 9662.5/9687.5/9700c fly settled 4.5. 0QN 9687.5/9718.75/9737.5c fly settled 2.75. The reason I favor broken flies is that an unexpected event could shift rates sharply lower; broken flies at expiry would still show a profit. I would like to buy a bit cheaper than settles.
| 2/28/2025 | 3/7/2025 | chg | ||
| UST 2Y | 399.5 | 400.0 | 0.5 | |
| UST 5Y | 402.6 | 409.4 | 6.8 | |
| UST 10Y | 422.9 | 431.5 | 8.6 | wi 432.2 |
| UST 30Y | 451.3 | 461.5 | 10.2 | wi 461.7 |
| GERM 2Y | 202.5 | 224.7 | 22.2 | |
| GERM 10Y | 240.6 | 283.6 | 43.0 | |
| JPN 20Y | 202.7 | 223.1 | 20.4 | |
| CHINA 10Y | 177.8 | 184.5 | 6.7 | |
| SOFR M5/M6 | -48.0 | -46.5 | 1.5 | |
| SOFR M6/M7 | 2.0 | 9.5 | 7.5 | |
| SOFR M7/M8 | 8.5 | 12.5 | 4.0 | |
| EUR | 103.78 | 108.34 | 4.56 | |
| CRUDE (CLJ5) | 69.76 | 67.04 | -2.72 | |
| SPX | 5954.50 | 5770.20 | -184.30 | -3.1% |
| VIX | 19.63 | 23.37 | 3.74 | |
| MOVE | 104.46 | 104.41 | -0.05 | |
U-6 is Total Unemployed, Plus All Persons Marginally Attached to the Labor Force, Plus Total Employed Part Time for Economic Reasons, as a Percent of the Civilian Labor Force Plus All Persons Marginally Attached to the Labor Force (U-6)
