Early morning panic abates as the day progresses
August 6, 2024
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–Interesting clip of Peter Lynch, star manager of Fidelity’s Magellan, “…in 93 years there have been 50 declines of 10% or more, about once every two years.” Yesterday at the low the SPX was down 9.7% from the recent high. On the day SPX fell 3.0%.
–After an early morning surge higher in rate futures, net changes were rather small. I marked 5s at an unchanged yield of 3.625%, with tens down just 2 bps at 3.781%. SFRZ4 settled 9592.5 up just 0.5 on the day, but the high was a panicky 9620, so the close was 27.5 off the high! Oct Fed Funds settled 9517 or 4.83% (hi 9532.5). Assuming no intermeeting shenanigans, if the Fed eases 50 in Sept, then EFFR should decline from the current level of 5.33% to 4.83%. And that’s where FFV4 is. Interestingly the curve flattened slightly, with 2s nearly unchanged at 3.883% but 10s down 2 and 30s down 4.6 to 4.066%. In the old days I would have figured a 30y mortgage would be around 5 to 5.25% given these treasury yields; that would loosen up the housing market in my opinion.
–All of a sudden there are a lot of experts on the yen carry trade. Not sure how that plays out, but Nikkei rebounded significantly today. Apart from flows related to Japan, it’s clear the US faces many uncertainties and a slowing job market that is likely to result in recession. As the WSJ says today “The Easy Money Reckoning Arrives”
–Just a couple of other FF prices: FFF5 settled 9590 or 4.10% and FFF6 settled 9699 or 3.01%. These contracts roughly price end-of-year 2024 and 2025 as the FOMC meetings are typically late January or early Feb. At the June FOMC, the SEP projections for Fed Funds for end-of ’24, ’25 and ’26 were 5.1, 4.1 and 3.1. The market has moved the calendar a year forward from the Fed’s timeline! (but other than that, the estimates are SPOT ON!).
–Trade deficit today, and auctions kick off with the 3yr. 10s and 30s may have a bit of drama this time. Are tens a value at 3 3/4% given a new administration (whoever it is) that will feel the need to spend heavily?
