Have you ever seen the rain
February 8, 2026 – Weekly Comment
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Someone told me long ago, There’s a calm before the storm.
–CCR, John Fogarty
On a societal level, it’s storming. In interest rate markets, it’s relatively calm.
On the week, SOFR contracts from Dec’26 (peak contract, at 9686.5) to Dec’28 ended +4. The next four countracts were +4.5. SFRZ6 is 3.135% (expecting modest ease) and SFRZ8 is 9650 or 3.5%. The five-yr fell 4.2 bps on the week to 3.755% (top end of FF band) and 10’s fell 3.5 to 4.206%. The two-yr, at 3.493% is at the lower band of the FF target, 3.50 to 3.75%. SFRZ6 range has been 9670 to 9717 since July. Benign rate environment.
SPX has been sideways with a slight bias higher since September, 6500 to 7000. However, there’s been tremendous rotation under the surface.
It was a much different time when stocks put in their high in October 2007. Warning signs were piling up. (I would argue there are similarities now). Fed eased 50 bps on September 18, 2007. Unemp 4.7, CPI 2.8. The link below captures commentary from that day. Mostly cheerleaders, except Metz
https://www.latimes.com/archives/la-xpm-2007-sep-19-fi-markets19-story.html
Also rallying sharply: shares of commodity producers, apparently on hopes that the global economic expansion will roll on, supporting a continuing bull market in oil, gold and other commodities.
“This was clearly a big day for the stock market,” said Hugh Johnson, chief investment officer at Johnson Illington Advisors in Albany, N.Y. “This signals preliminarily that there will be no recession and that the bull market will resume.”
Gold, historically a refuge in times of rising inflation, reached a 27-year high. Gold futures for December delivery jumped in after-hours trading as high as $735.50 an ounce — the highest price for the metal’s most-active contract since February 1980.
“I have a feeling the rally’s over,” said Michael Metz, chief investment strategist at Oppenheimer in New York. The rate cut is “a short-term Band-Aid but doesn’t solve the problem.”
Stocks rose in the morning in part because brokerage Lehman Bros. reported better-than-expected third-quarter earnings. That allayed some fears about the effect that the financial-market turmoil is wreaking on the premier investment banks.
Looking back at the GFC period and the initial Sept 2007 rate cut, I decided to extend the timeline of the above chart to include gold’s run into late 2011, and the lockstep movement of stocks with the Fed’s balance sheet (QE) from 2009 to 2014. (Warsh resigned in Feb 2011).
I would note that in September 2007, the 2/10 spread was around 60 bps, a little lower than it is now (71). By March 2008 it was over 200 as the Fed slashed rates. Of course, that was from a much higher start: in Sept 2007 the Fed cut from 5.25 to 4.75. 10y yield was just under 4.5% pre-cut. By March’08 FF were 2.25%, while the 2y at 1.5% was forecasting further cuts. Tens were 3.5%.
While SPX currently appears calm, there are storms under the surface. As an example, here’s a chart of IGV an etf with top holdings: MSFT, PLTR, CRM, ORCL, INTU, ADBE, PANW, APP, CRWD. Security description: Expanded Tech-Software Sector. Well it’s not expanding any more, (but likely due for a bounce). Essentially a complete roundtrip from the Liberation lows in April. It’s a bit hard to see on the chart but from April to Sept, +53% and from October to now-33%. I would note that even now, MAG7 market cap is just shy of $21 trillion, compared to, for example, total mkt cap of Japan (in USD) of just over $8 trillion (approximately equal to AAPL plus NVDA). Takaichi’s election win this weekend is expected to provide a tailwind to Japanese stocks.
While IGV has suffered a 33% pullback, it’ nearly inconceivable to think SPX could ever suffer the same fate. However, if it did, SPX would be just under April ’25 Liberation lows.
A concern of many is that Warsh is against using QE as a normalized part of the Fed’s playbook. The thinking goes (and I am guilty of this as well) is that if QE is not part of the equation, the Fed put strike is MUCH lower. If there’s a link between SPX and the Fed’s Balance Sheet, as reflected by 2009 to 2014, then NO QE is bearish. However, recent history reveals the link seems to have broken around 2023. Chart below. (Fed had stopped tightening, balance sheet was declining, stocks rose). Reserves were more than ample through that period; perhaps that’s why the relationship ended.
Asset prices seem to be the dominant factor for the US economy. In part, asset prices are supported by passive 401k flows. A more meaningful decline in employment, whether sparked by AI productivity or other factors, will remove a support pillar from stocks.
Thursday featured negative labor market stats: a big jump in Challenger layoffs, Jobless Claims 231k, and a large decline in JOLTS (job openings) to 6542, the lowest level since 2020. Payrolls are released on Wednesday February 11. Not sure if Trump is going to post it on Monday, or Tuesday.
This week:
Tuesday: Retail Sales expected at a solid 0.4%.
Wednesday: NFP expected 69k from 50k but BBG economics warns of a lower number as the birth/death model has been tweaked. According to BBG ECO the Final benchmark Payroll Revision is expected -863k.
Federal Budget balance for January
Thursday: Jobless Claims and Existing Homes
Friday: CPI and Core expected 0.3%. YOY 2.5 from 2.7 and 2.5 from 2.6.
Last week I posted an item from Crain’s Chicago, that an office building in Chicago’s financial district had sold at just $41 million, an 87% discount from the 2018 price of $306 million. There’s a new example this week, just two blocks west, opposite Willis Tower:
The University of Illinois is set to buy 92% vacant 250 S. Wacker Drive Chicago, Illinois for 26% of its price 15 years ago. Purchase price $23.8M. Last sold in 2011 to a venture of investment bank Credit Suisse for $90M. In 2024 its anchor tenant, Molson Coors, vacated around 167,000 SF. The property today has one remaining tenant occupying about 20,000 SF. 244,954 SF Built 1958 -Crain’s
OTHER THOUGHTS
There are a lot of trades going through SOFR options that are targeting lower rates, but not aggressively so. For example, buying of SFRZ6 9700/9750/9800 c fly. Center strike 2.5% vs current FF range 3.50 to 3.75%. Fly settled 5.25 ref 9686.5. Similar flies and condors went through on SFRU6; buyer 20k SFRU6 9675/9687.5/9712.5/9737.5 c cond 2.25. Settled there ref 9679.0. Decent size buying of SFRM6 9700c for 3.0. Settled 3.75 ref 9660. The general theme seems to be that a Warsh led Fed could get rates down to 2.5 to 3.0, but in a measured way, and probably not much lower than 2.5%.
Midcurve Feb options expire Friday, 0QG6 9687.5 straddle settled 10, as did 2QG6 9662.5^ as did 3QG6 9650^. All settle 10 vs SFRH7 9686, H8 9667.5 and H9 9645.0. Given economic data this week, I’d more likely be a buyer than seller, but just barely.
| 1/30/2026 | 2/6/2026 | chg | ||
| UST 2Y | 352.4 | 349.3 | -3.1 | |
| UST 5Y | 379.7 | 375.5 | -4.2 | |
| UST 10Y | 424.1 | 420.6 | -3.5 | wi 421.7 |
| UST 30Y | 487.4 | 485.5 | -1.9 | wi 485.3 |
| GERM 2Y | 208.5 | 208.2 | -0.3 | |
| GERM 10Y | 284.2 | 284.1 | -0.1 | |
| JPN 20Y | 317.2 | 312.3 | -4.9 | |
| CHINA 10Y | 180.7 | 180.6 | -0.1 | |
| SOFR H6/H7 | -43.5 | -47.0 | -3.5 | |
| SOFR H7/H8 | 18.5 | 18.5 | 0.0 | |
| SOFR H8/H9 | 23.0 | 22.5 | -0.5 | |
| EUR | 118.51 | 118.15 | -0.36 | |
| CRUDE (CLH6) | 65.21 | 63.55 | -1.66 | |
| SPX | 6939.03 | 6932.30 | -6.73 | -0.1% |
| VIX | 17.44 | 17.76 | 0.32 | |
| MOVE | 59.20 | 63.62 | 4.42 | |
