Cheeseburger. No Coke. Pepsi.

July 28, 2019

Above is an interesting graphic from The Daily Shot last week, that shows the change in price over the past year for cheeseburger ingredients.  Of course, they forgot the Grey Poupon.  And the bacon.  An increase of 4.8%.  A couple of questions.  Who, in America, eats a 4 oz cheeseburger?  And how does McDonald’s make any money? 

The title above refers of course, to the classic SNL skit parodying Chicago’s Billy Goat Tavern on lower Michigan.  If you don’t read another word, watch the skit.  My work is done here…

Every central bank in the world is easing, ostensibly because there isn’t enough inflation. Perhaps though, it’s just to keep the sovereign debt merry-go-round spinning.  Q2 GDP report from Friday showed US Federal Gov’t spending growth at 7.9% rate for the quarter.  From the Fed’s last Z.1 the rate of growth of Federal borrowing was 8.57% in Q1, to $18.2T.  More outstanding debt than the Household Sector at $15.7 and more than Total Business at $15.6T.     

This week brings the FOMC announcement on Wednesday and a flurry of other economic data, including Core PCE Deflator on Tuesday, the Fed’s preferred measure, expected 1.7%.  Mfg ISM and Prices on Thursday, expected 52.0 and 49.0.  The employment report caps the week on Friday, with NFP expected 170k. 

First, let’s focus on the Fed.  Guidance toward a 25 bp insurance cut has been explicit.  It’s generally acknowledged that financial conditions are fairly loose going into this week. However, it’s somewhat interesting to compare prices from June 21, the Friday after the last FOMC meeting to the week just ended.  The two-year yield rose, from 1.78% to 1.868%.  Tens and thirty year bonds are essentially unchanged, 2.064 to 2.07 and 2.59 to 2.60.  The large changes were, EDU9 from 98.015 to 97.815 (+20 bps in yield) and EDZ9 98.115 to 97.905 (a 21 bp yield jump).  In these past 5 weeks, SPX gained about 2.5% and Nasdaq 4.0%.  The BBB Corp bond spread went from 160 bps to 148, equaling the low of this year. 

Obviously, part of the increase in the yield of near eurodollar contracts was the deflation of hopes for a fifty basis point cut.  However, week to week changes in EDU9 and EDZ9 were -9 and -8.5 bps (97.905 to 97.815 and 97.995 to 97.905), as the debt-ceiling deal raises the prospect of heavy sales of t-bills.  Stocks and credit spreads seem to be responding positively to the idea of combined monetary and fiscal stimulus.   That’s the “rocket ship” Trump seems to be touting, but it’s mostly the result of financial engineering. On the fiscal side, that fuel will be burning right into next year as the election looms.

The Fed will almost certainly cut by 25 bps Wednesday and characterize it as an insurance ‘risk-management’ action, to immunize the US from overseas spillover.  ISM and Employment data immediately following will set the tone.  If stronger than expected, the criticism will be that a cut wasn’t necessary.  If weak, the market will price higher odds of another move in September. 

In terms of pricing, the Aug/Oct Fed Fund spread, which isolates the September FOMC, settled at -16.5 on Friday, indicating odds better than 50/50 for another 25 bp cut in Sept.  The near one-year eurodollar calendar spreads settled as follow:  EDU9/EDU0 -48.5, EDZ9/EDZ0 -40.0 and EDH0/EDH1 -21.5.  While these settles are near the lower end of recent ranges, they don’t reflect the idea of truly aggressive forward easing out of the Fed. In late 2007 the near one-year spread touched a record low of -158 bps.  As it turned out, that spread was actually conservative relative to the magnitude of easing in the following year.  As mentioned, some of the current weakness in the front ED contracts (which has kept pressure on the one-year spreads) is due to possible t-bill supply issues.  At this time, interest rate markets are probably appropriately priced, without an exaggerated lean one way or the other.

Perhaps the more interesting focus going forward will be on whether the market accommodates voracious US Federal Gov’t borrowing.  If the front end of the curve responds to bills, does the market need to make a concession in longer maturities?  It’s worth noting that DXY has firmed since the last FOMC and that the Emerging Market etf, EEM, has only gone sideways.  The administration is trying to jawbone the dollar lower (by officially announcing that the idea of weakening the dollar has been dismissed).  Gold has maintained a bid.   

It should be an interesting week.  The only conclusions I will draw is that growth is less organic, and more engineered by the authorities.  After the tax package and repatriation of early 2018, there was a spurt in activity that fizzled out going into the end of last year.  My suspicion is that current efforts will have a decreased marginal effect on the economy.


On Friday, FFQ9 settled 97.885.  That’s probably within a few bps of what will be its ultimate settlement.  Open interest in the contract is most for any FF at 565k.  October is the next highest at 345k, having settled 98.05.  It was a banner day on Friday for FF options, as 16k FFQ9 97.8125 puts were sold from 1.75 to 1.5 bps.  There is NO OTHER open interest in FF options besides Aug puts. 

Treasuries are in consolidative patterns, with possible head and shoulder tops beginning to form.  This week may point the way to larger moves.

7/19/2019 7/26/2019 chg
UST 2Y 181.2 186.8 5.6
UST 5Y 180.3 186.0 5.7
UST 10Y 204.7 207.9 3.2
UST 30Y 257.7 259.9 2.2
GERM 2Y -76.8 -75.0 1.8
GERM 10Y -32.4 -37.6 -5.2
JPN 30Y 37.2 35.1 -2.1
EURO$ Z9/Z0 -39.0 -40.0 -1.0
EURO$ Z0/Z1 4.0 1.0 -3.0
EUR 112.34 111.28 -1.06
CRUDE (1st cont) 55.76 56.20 0.44
SPX 2976.61 3025.86 49.25
VIX 14.45 12.16 -2.29
Posted on July 28, 2019 at 9:12 am by alexmanzara · Permalink
In: Eurodollar Options

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