Gauging Stimulus

August 9, 2020 – Weekly comment

Three statisticians went duck hunting.  A duck was approaching and the first statistician shot, missing the duck by shooting a foot too high.  The second guy shot and was a foot too low.  The third cried, “We hit it!”

Nasdaq made a new all-time high this week at 11276, while SPX is within 45 points of a new high.  Gold soared to a new high of $2075/oz, but pulled back to 2035 on Friday, still up nearly $80/oz on the week.  However, the ten year note was up only 2.4 bps on the week to 55.9, in spite of a stronger than expected employment number.  Tens tested 50 bps late Tuesday and again on Thursday. 

Treasury announced the refunding for this week’s auctions, which consists of $48 billion 3s, $38 billion 10s and $26 billion 30s.  With maturing amounts of $49.5 billion, this represents $62.5 billion in new borrowing.  In a week.  These numbers are getting awfully large, but the Fed’s purchases and promise to keep funding rates here for a long time (SOFR has been pegged between 8 and 12 bps since June) gives domestic buyers incentive to ride the carry. 

From a Wall Street Journal article on Aug 4, “The Fed has long resisted becoming the world’s backup lender.  But it shed reservations after the pandemic went global.  The massive commitment was among the Fed’s most significant – and least noticed – expansions of power yet.  It eased a global dollar shortage, helped halt a deep market selloff and continues to support global markets today.  It established the Fed as global guarantor of dollar funding, cementing the US currency’s role as the global financial system’s underpinning.”

It was just under a year ago that the Fed was jolted by a surge in repo in mid-September.  SOFR had spent last August in a narrow range around 213 bps, but it spiked to 5.25% on Sept 19.  This potentially catastrophic event was seared into the Fed’s psyche as evidenced by many Fed speeches thereafter.  It’s a dollar funded world, now more than ever, and even a brief hiccup can cause a daisy chain collapse.  By the way, this week’s auctions settle on 17-August.  

What also made a new all-time high this week was USD (and everything else) versus Turkish Lira.  TRY hit 7.3662 Friday as the pressure mounts for Turkey to dramatically raise rates to stem capital flight.  “…a rate hike now, at a time when the government is desperate to underwrite the real economy, would be met with political fury.  Doubtless the current CBRT Governor Murat Uysal fears for his job.”  According to BBG. “…tens of thousands of twitter users called for the resignation of Berat Albayrak, Erdogan’s son-in-law and Minister of Treasury and Finance since July 2018.”  When Albayrak was shoe-horned into his ministerial post, an ounce of gold was around 6000 lira, now it’s 14818 lira.  The Fed has gone into every nook and cranny of financing to support zombies, states and junk.  However, as Richmond Fed President Thomas Barkin said on May 6, the US central bank’s foreign facilities are meant to stabilize markets and not provide funding, adding that several other countries including Turkey have access to a broader o/n repo facility. (RTRS).  Is a destabilized Turkey a priority for the Fed?  Probably not, though Turkey’s continued belligerence towards its neighbors may provoke a geopolitical response.

The question is whether the Fed might unwittingly lose control of SOFR again, given fragilities throughout the global system.  The current answer from the market is NO.  For example, lib/ois as described by the futures proxy FFF1 – EDZ0 ranged from 26 t0 30 from mid-April to mid-July.  However, this week it put in a low close of 21.0 and ended the week 21.5.  EDZ0 9975p settled 5.75 vs futures 9973.5, and that’s with libor setting right around 25 bps.  Markets have put full faith into the Fed’s control.

Closer to home the question turns to states and municipalities that have been stretched thin by the coronavirus response and subsequent rioting.  As an example, Alderman Brian Hopkins in Chicago notes damage to the Magnificent Mile, both due to C-19 and more recently, rampant violence:  “We’re losing tax revenue and we are losing sales tax on a daily basis.  If this trend continues we won’t have a viable downtown. …if it keeps up, we are going to see a rash of business closures in the downtown area.”  That’s a story playing out across many large cities, and wealthy residents are moving out, taking the tax base with them.

Congress and the Administration could not agree on an extension of C-19 relief, as Democrats wanted money for states with pension problems unrelated to the pandemic.  Therefore, Trump signed an executive measure on Saturday which is much smaller in scope than Democratic proposals.  The weekly unemployment payment was reduced to $400/week from $600, and a payroll tax deferment was also included.  Uncertainty as to the legality of this action will likely water down its efficacy.  That duck has flown.  Now it’s a matter of whether equities can hold.  On that score, it’s worth a mention that the US Internat’l Development Finance Corp and the SEC are looking into the $765 million loan bestowed on Kodak to make pharmaceuticals.  Certainly the trials and tribulations of one stock, with associated allegations of insider dealing, doesn’t mean that the entire market is vulnerable.  But a diminished fiscal impulse is a clear headwind to continued equity market gains.

PPI and CPI on Tuesday and Wednesday, with yoy Core expected +0.1 and +1.1.  Retail Sales on Friday, along with UofM prelim inflation expectations.  Gold, silver, bitcoin and treasury-tip breakevens are suggesting there’s upside play in inflation. 


There were buyers on Friday and during the week of EDZ0 100c for 1 (settled there ref EDZ0 9973.5), and of 0EV 100c with settled 0.75 vs EDZ21 at 9980.0.   However, FF contracts closed lower on the week.  The current peak of the curve, FFJ22 to N22, settled 100.03 from 100.06 the previous Friday.  The Fed has been consistent in repudiating the idea of negative rates, and premium for that possibility is compressing.

UST 2Y10.912.51.6
UST 5Y21.422.61.2
UST 10Y53.555.92.4
UST 30Y119.6122.63.0
GERM 2Y-71.3-68.33.0
GERM 10Y-52.4-50.81.6
JPN 30Y52.554.72.2
EURO$ U0/U1-7.0-3.53.5
EURO$ U1/U22.01.5-0.5
EURO$ U2/U310.010.00.0
CRUDE (active)40.2741.220.95

Posted on August 9, 2020 at 1:03 pm by alexmanzara · Permalink
In: Eurodollar Options

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