Consolidation after end of week explosions
Nov 14, 2022
–New lows in near one-yr ED and SFR calendars. Lowest is now EDM3/EDM4 at -114.5. Lowest outright SOFR contracts are H3 and M3 at 9514.5 and 9517…not quite to 5%, but close. Stocks built on Thursday’s spectacular rally on Friday, but bonds have retreated slightly. Even with the collapse of FTX, SFRZ2/EDZ2 spread has retreated from highs in the lower 50’s, having settled Friday at 47.5.
–Heavy selling in SFRU3 9550 and 9537.5 straddles 84 to 83. As mentioned over the weekend, EDU3 9512.5^ settled 83.0 on Friday. One month ago just prior to the release of CPI (Oct 11), EDM3 9512.5^ was 96.5 and the EDU3 9525^ was 118.5.
–Cathie Wood is turning up the volume on warnings about the Fed being too tight, saying a 1929 Great Depression era could ensue. Lighten up Cathie. It is true though that severe curve inversion is also sending the signal the Fed is going to force job losses and further reduce economic activity.
–CLZ2 currently trades around 87.80. Now that elections are over, and the entire world knows the US is short due to SPR releases, watch out if CLZ closes above 95/96.
It will never be exactly right
November 13, 2022
Wild week. CPI slightly lower than expected. Elections; Republicans regain the House. FTX/crypto implosion. Powerful equity rebound as yields plunged. SPX up 5.9% on the week and the ten year yield plunged over 30 bps to 3.83% by Thursday’s close.
In this note I am just focusing on the front end with respect to the forward path of Fed policy.
Here’s a clip from Powell’s press conference on November 2:
Again, if we over tighten, and we don’t want to, we want to get this exactly right, but if we over tighten, then we have the ability with our tools, which are powerful, to, as we showed at the beginning of the pandemic episode, we can support economic activity strongly if that happens, if that’s necessary. On the other hand, if you make the mistake in the other direction, and you let this drag on, then it’s a year or two down the road and you’re realizing inflation behaving the way it can, you’re realizing you didn’t actually get it, you have to go back in. By then the risk really is that it has become entrenched in people’s thinking and the record is that the employment costs, the cost to the people that we don’t want to hurt, they go up with the passage of time.
There are two points to make. 1) It’s impossible to get this “exactly right” (and of course Powell knows that). Monetary policy operates with a lag of 2 to 4 quarters and the first hike was only in March, eight months ago. It reminds me of the scene in the Big Short where Lawrence Fields is demanding his money back, and Burry explains, “…the second quarter of 07 is when the adjustable rates kick in and defaults will skyrocket.” There are a lot of contracts that haven’t yet ‘kicked in’. 2) Powell has repeatedly said we have to stick with the program until we’re sure the job is done.
After the November 2 FOMC, SFRZ2/Z3 went to a high of 29 and a high settle of positive 21, in a nod to point 2 above. After CPI and the FTX meltdown the spread settled Thursday at -19.5 (9549.5/9569.0), a huge swing of 36 bps on the week, reflecting the idea that market forces may overwhelm Powell’s good intentions. As can be seen on the chart above, after the July 13 CPI release this spread printed -74 and has been gradually firming since then. The Thursday plunge indicates that tightness in financial conditions is filtering through the economy and will result in eventual ease. (Every 1-yr SOFR spread is inverted until Sept’25/Sept’26. The most inverted is June’23/June’24 at -109). The market is strongly hinting the Fed is too tight.
There was large selling (50k) of SFRU3 9550 and 9537.5 straddles after Thursday’s data around 84 to 83. What has occurred is a narrowing of possibilities regarding the future path of policy. Even if inflation levels begin to come down and the Fed is slowing down hikes, a long pause is more likely than easing. FFF3 settled Friday 9564.5 or 4.355%, very close to what will be the new EFFR of 4.33 on a hike of 50 at the Dec 14 FOMC. FFG3 settled 9531.5 or 4.685%, midway between 4.58 and 4.83, which would approximately price 25 or 50 at the Feb 1 FOMC.
SFRU3 settled Friday 9537.0. SFRU3 9550^ settled 84.75 (36.0/48.75) and 9537.5^ settled 83.0 (41.25/41.75). Atm EDU3 9512.5^ settled 83.0 (40.75/42.25) ref 9511.0, essentially the same nominal level as SOFR. One month ago, on 10/11/22, EDU3 9525^ ref 9524 settled 118.5 and the EDM3 9512.5^ ref 9513 settled 96.5. There has been a massive decline in premium since peak levels just prior to the October CPI release. Again, this decline was forcefully accentuated this week as policy expectations at the next two meetings have galvanized.
Below I’ve attached an infamous Business Week cover from August 1979. ‘The Death of Equities’. Of course, the market staged a strong rally in 1980. Also, the 1979 story was well after the 1974 plunge to new lows. However, one can make the case that times are quite similar. The article contains this excerpt:
To bring equities back to life now, secular inflation would have to be wrung out of the economy, and then accounting policies would have to be made more realistic and tax laws rewritten. But these steps may not be enough. “It will take two or three years of confidence building, of testing, before the market can seriously act like it did in the 1950s and early ‘60s,” says William J Fellner, a professor of Economics Advisers.
Interesting because of the inflation parallels and to confidence being wrung out of the crypto world. The rapid adoption of crypto currencies as an asset class has been due in part, to a lack of faith in policy makers and fiat currency. Perhaps gold will rightfully retake its place as the anti-establishment asset (up 5.3% this week). However, I certainly don’t think it’s safe to write about the demise of bitcoin. It’s likely nearer to the bottom than generally thought, though excesses will likely still take more leveraged players out.
It’s not ALL about the US. China takes the cake for overleveraged real estate. Here’s a clip from Reuters over the weekend:
BEIJING, Nov 13 (Reuters) – Chinese regulators have asked financial institutions to extend more support to property developers to shore up the country’s struggling real estate sector, two sources with direct knowledge of the matter said on Sunday.
A notice to the institutions from the People’s Bank of China (PBOC) and the China Banking and Insurance Regulatory Commission (CBIRC) outlined 16 steps to support the industry, including loan repayment extensions, in a major push to ease the deep liquidity crunch which has plagued the property sector since mid-2020.
Extend and pretend.
Empire Mfg amd PPI Tuesday.
Retail Sales, Industrial Production and the 20y auction on Wednesday
Housing Starts, Philly Fed and Jobless Claims Thursday
Existing Home Sales Friday
NOTE: WEEKLY CHANGES ONLY TO THURSDAY 11/10 SINCE FRIDAY WAS A HOLIDAY
| 11/4/2022 | 11/10/2022 | chg | ||
| UST 2Y | 464.6 | 432.4 | -32.2 | |
| UST 5Y | 432.0 | 394.1 | -37.9 | |
| UST 10Y | 415.0 | 382.7 | -32.3 | |
| UST 30Y | 424.3 | 404.3 | -20.0 | |
| GERM 2Y | 212.8 | 216.9 | 4.1 | |
| GERM 10Y | 229.5 | 201.0 | -28.5 | |
| JPN 30Y | 155.5 | 150.7 | -4.8 | |
| CHINA 10Y | 270.6 | 269.6 | -1.0 | |
| SOFR Z2/Z3 | 16.5 | -19.5 | -36.0 | |
| SOFR Z3/Z4 | -78.0 | -83.0 | -5.0 | |
| SOFR Z4/Z5 | -28.5 | -24.0 | 4.5 | |
| EUR | 99.84 | 102.09 | 2.25 | |
| CRUDE (CLZ2) | 92.61 | 86.47 | -6.14 | |
| SPX | 3770.55 | 3956.37 | 185.82 | 4.9% |
| VIX | 24.55 | 23.53 | -1.02 | |
In: Eurodollar Options
Veteran’s Day
November 11, 2022
–Yields imploded as CPI printed softer than expected 7.7 vs 7.9 expected and Core 6.3 vs 6.5. Tens were auctioned Wednesday at 4.14% and were 3.827% at futures settle, with TYZ up 2-06 at 112-165. Red euro$ pack up over 40 bps with EDM4 the star, up 42. New lows in one-year calendars with EDM3/EDM4 -109 (9488.5/9597.5) down 18 bps on the day. On the SOFR strip M3/M4 settled -103 (9520.5/9623.5). As mentioned yesterday, the lowest one-yr in 2007 was -158.
–The perceived end of hikes moved slightly forward on the curve with March’23 now the lowest contracts, both ED and SFR. On the FF curve, May’23 is now the lowest at 9512.5 or 4.875%. FFF3, which prices the Dec 14 FOMC settled 9565.5 or 4.345%. Current EFFR is 383, another 50 at the Dec meeting means 433, and that’s essentially where we are. DXY has taken out the mid-Sept low, printing 107.85 late yesterday and it’s lower this morning.
–As of yesterday’s close, the ten year yield was nearly 250 bps below the Core Inflation print. One thing that Powell emphasized at Jackson Hole is that the Fed has to stay at it until the job is done, rather than repeat previous start/stop mistakes. FFF3/FFG3 settled 33.5 (9565.5/9532.0) so the market still perceives a hike at the Feb 1 FOMC, though leaning towards 25 rather than 50. After that, the wheels come off, but it’s no sure bet that the Fed will shift towards ease.
–Large seller of approx 30k SFRU3 9550 straddle yesterday 84.5 to 83.0. Settled 83.25 vs 9541.5 down 13.5 on the day as vol declined across the curve. I marked TYZ at 6.6 vol yesterday, having been over 10 in mid-October. Nov midcurve options expire today, with the one-day straddles settling 8 to 9 bps yesterday. Beware of crazy late day moves.
–Banks closed for Veteran’s Day, but CME screens open a full session and Vet’s Day isn’t even listed on the CME holiday calendar. For shame! (It’s on the Fed’s calendar). Old floor days a military unit would come onto the floor pre-open for an honor guard ceremony in the pit (pretty sure Stu Unger helped organize that). Dead silence except for clicking time clocks and unanswered phones.
Bad news trickle starting to accelerate
November 10, 2022
–Attached chart shows SFRU3/U4 which settled at a new low -88.5 yesterday (9510/9598.5). EDM3/EDM4 settled -91.0. These are new lows for the most inverted 1y calendars on the strips; the implication is a strong possibility of eases starting some time next year. In late 2007 the most inverted 1-yr calendar was the 1st to 5th contract at -158 bps.
–Poor ten-year auction 3.4 bps through at 4.14%, featuring low bid/cover of 2.23, yet TY futures rallied into the end of the day as Binance walked away from FTX and Bankman-Fried pegged the hole at $8 billion. TYZ2 settled 110-10+ but was trading 110-16 late and is between those two levels at this writing (going into CPI and the 30y auction). By comparison Bill Hwang of Archegos lost $20 billion in March/April 2021.
–Is crypto implosion enough to create a true safety bid? Probably not, but Steph Pomboy notes that Ontario Teachers Pension was a major investor in FTX, and succinctly tweeted, “My point is that it isn’t just OTPP, it’s every pension (no doubt). Only way to deliver on 8% return mandates in a 0% risk free rate world is via reckless risk. THIS is the silent but deadly consequence of yrs of repressive rates imposed by the Fed…” Apart from monetary losses at FTX, job losses are being announced at an increasing clip. Meta cut 11k jobs or 13% or its workforce. Redfin also cut 13%, totaling 892, and closed the home-flipping business. DR Horton , the largest US homebuilder, reported net sales orders for July-Sept fell 15% from a year earlier, and fell 10% in value. Chicago Fed’s Evans said it’s time for the Fed to slow the pace of rate hikes. Trades in SOFR calls are already reflecting that sentiment, for example late trade of SFRF3 9550c for 2.25 ref 9501 in underlying SFRH3. The six-month calendar Dec’22/June’23 SOFR settled +44.5 (bias toward hike in the beginning of the year), but June’23/Dec’23 settled negative 35.5, essentially forecasting the erasure of a hike early in the year. Prices: 9541, 9496.5, 9532.
–Today’s news includes CPI, expected 7.9% yoy vs 8.2%, with Core 6.5 from 6.6. Jobless Claims expected 220k. Thirty year auction.
Ten year auction today
November 9, 2022
–Ten year yield fell 8.6 bps in front of today’s auction and election results. In part, a bid for safety was supported by the crypto conflagration, with bitcoin below 18k, its lowest level since late 2020. “Sam Bankman-Fried’s $16 billion fortune is eviscerated” according to BBG. Negative covid news from China also a factor for treasury buyers. DXY eased to its lowest level since mid-September. Gold (GCZ2) gained $35 to 1716. Canada dollar breaking out to upside.
–Jan’23 FF contract settled +1.5 at 9559 or 441 bps, leaning closer to 433 or 9567 which should be the new EFFR on a 50 bp hike in December. In dollars, red/gold pack spread made a slight new low at -74.75, down a bit more than 2 bps. 2/10 holding at -55. SFRZ2 settled 9539.5, just about 20 bps lower than FFF3. Both contracts reflect the Dec FOMC, but the SOFR contract also prices the Feb 1 FOMC, which is only six and a half weeks into the contract period. The market currently is pricing the Feb meeting closer to 50 than 25. Jan/Feb FF spread settled 38 (9559/9521).
You can drive away in this FTT token TODAY!
November 8, 2022
–Election day and 3-yr auction. I’m leaving now to get to the voting booth (for the FIRST time today)
–According to coinmarketcap.com FTX token FTT is down over 21% today. Bitcoin is down over 5%, as there appears to be a run on FTX. Binance is said to be liquidating its holdings of FTT tokens. Citing the same website:
The global crypto market cap is $982.67B, a 4.56% decrease over the last day.
Not enough to get excited about, at its peak in November 2021 the crypto market was supposedly valued at over $3 trillion. As a comparison, Invidia alone lost over $350b market cap, more than half its value, since December.
–Option activity on the short end favored upside:
BUY 60k SFRZ2 9575/9587.5cs 0.25
BUY 20k SFRZ2 9531.25/9543.75cs 6.75
BUY 20k SFRH3 9525/9587.5cs 6.5
SELL 30k SFRZ2 9537.5/9525.0ps 5.0
SELL 20k SFRH3 9550/9500ps 37.25
January FF settled 9557.5 or 442.5. EFFR is 383. If there’s a 25 hike at the Dec FOMC, then EFFR = 408, which would put the top listed call spread in play, depending of course on the Feb 1 FOMC odds.
If there’s 50 in Dec, then EFFR 433 (a price of 9567). The second call spread listed, Z2 9531.25/9543.75 should fill in with only 50 bps.
If there’s 75 in Dec, then EFFR 458 (a price of 9542). Again, depending on how the Feb 1 meeting is priced, the SFRZ2 9537.5/9525ps should go out worthless. Currently Jan FF give a slight lean towards 50 rather than 75.
–There were a few articles about USED CAR price declines according to the Manheim index. It had to end sometime….
https://publish.manheim.com/en/services/consulting/used-vehicle-value-index.html
Treasury auction test this week
November 7, 2022
–On Friday 10/21, FVZ2 posted a new contract low 105-14.75. It was an outside day with a higher close. By the next Friday it had reached 107-18.25. Last Friday, FVZ2 posted another outside day with a low just above the October 21 low: Friday’s range 105-18.25/106-11.25, with a higher close 106-065. Selling pressure is abating. Same general pattern in TY. The low was Oct 21 108-26+. Friday was an outside day with a low of 110-01+ and a slightly higher settle. USZ had a weak close, but is still above lows from the previous week. Auctions this week of 3s, 10s and 30s will be a big test for treasuries.
–China’s possible end to Covid restrictions is causing a surge in China’s equities and commodities. Gold rallied more than $50. Copper up nearly 27 cents in what appears to be a breakout.
–November midcurve options expire Friday. ATM straddles in 0E, 2E and 3E settled 20.5 bps (ref EDZ3 9498.5, EDZ4 9576.5, EDZ5 9605.0). It is Veteran’s Day Friday. Banks are closed; the screen will be open for some stupid reason. US week-2 119.5^ settled 2’06 ref USZ 119-14. One point in the US contract is worth around 7.5 bps. CPI and thirty-year auction on Thursday. Could things really get pushed around late Friday when no one’s around?
Too Tight?
November 6, 2022 – Weekly Comment
“Interest rates are still accommodative, but we’re gradually moving to a place where they will be neutral. We may go past neutral, but we’re a long way from neutral at this point, probably.”
–Jerome Powell, October 3, 2018
On Sept 26, 2018, with inflation remaining near 2%, the Fed hiked ¼ to 2.0-2.25%. Powell’s comment above was right after that meeting. At the November meeting rates were kept steady. December 19, 2018 was the final hike, to 2.25-2.5%, but the wheels had already come off, from Oct 3 to Dec 19, SPX fell over 15%, and by Dec 24 it was down 19.5% (in less than three months).
Powell at last week’s press conference, “…very premature to be thinking about pausing” and “it’s tough to make the case that the Fed is too tight.” In late 2018 the market had concluded the Fed WAS too tight. By the end of the year, every option trade in the short end was focused on ease trades. Besides the equity market, what were other clues of Fed stinginess? 1) the red/green Eurodollar pack spread (2nd to 3rd year) was over 20 bps early in 2018, but ended the year at -8, sinking to an eventual low inversion of -9.6 in March 2019. 2) the 2/10 treasury spread was 78 bps in early 2018, and ended at 10.7, eventually inverting to -5 bps by August 2019. Inverted curves reflect a tight Fed.
Is it hard to make the case the Fed is too tight now?
Currently the red/green euro$ pack spread is -58.25, having hit a historic low of -62 on Thursday, more deeply inverted than 2018 by over 50 bps. Red/green was positive 30 bps in January. On Friday, 2/10 ended -49.6 bps, having reached a new low of -57.3 on Thursday, just taking out a previous low of -56 from the year 2000. It started the year +90. A decline of nearly 150 bps in 11 months.
However, in 2018 the high of yoy Core PCE was only 2.1%. The terminal FF target actually exceeded this inflation measure. The high so far this year in yoy Core PCE is 5.4%, the current EFFR is 3.83% and the peak FF target as forecast by the FF futures curve is 5.085%, as both FFM’23 and FFN’23 settled 9491.5. So perhaps by this metric, the Fed is NOT too tight. The question is whether Core PCE prices will begin to retreat below 5% and eventually sink below the FF target. This is the dragon that Powell wants to slay.
On this score, it’s worth noting that the Fed’s balance sheet has declined by a few percent since the peak in April, and that it’s now below where it started 2022 (current $8.677T vs $8.757T at the end of last year). More importantly, consider yoy M2 and Core PCE prices on the chart below. YOY M2 growth has plummeted to just 2.6%, having screamed as high as +25% in response to covid. For the sake of comparison, during the GFC, M2 growth reached just over 10%, followed by a rebound in inflation from the lowest level since the turn of the century at +0.6% to a peak of 1.8% in 2010. Correlation is not causation, but it certainly appears as if inflation followed the surge in M2. Might the recent plunge in M2 foreshadow a sharp deceleration in prices? If so, then it wouldn’t be surprising for Core PCE prices to decline below EFFR some time in 2023. It’s also likely that the elections will solidify perceptions of gridlock with respect to government spending, thus restraining a growth catalyst.
When looking at some of the week-to-week changes, near one-year calendar spreads exploded higher: for example SFRZ2/Z3 went from -12.5 to +16.5, and FFF3/FFF4 from +6.5 to +39.5, changes of 29 bps and 33 bps respectively. The market has accepted the idea that eases may be pushed later into 2023 or even into 2024. However, consider just the settle of FFF3. This contract now prices the December FOMC. After last week’s hike, EFFR is 383 bps or 9517.0 in terms of price. FFF3 settled 9560, or 57 bps higher than the current EFFR, up from the previous Friday settle of 9558. In other words, the market is leaning toward 50 at the last meeting of the year, rather than another 75. For now, the market has embraced Powell’s messaging: smaller rate increases which may continue for a while.
The two-year note is the only maturity that made a new high for the move, ending the week at 4.65%. The 30 yr bond ended just below 4.25%; October’s high was 4.38%. Auctions of 3s, 10s and 30s this week. CPI is Thursday, yoy expected 7.9% vs 8.2% last. Core expected 6.5% vs 6.6% last; note that the Core 6.6% reading last time has been the high of the cycle. Veteran’s Day is Friday. Banks and the Fed will be closed.
Election day is Tuesday. (Results in a few weeks).
“Good, better, best. Never let it rest. ‘Til your good is better and your better is best.” -St Jerome.
It’s a good bet that anyone who names their kid Jerome is knowingly heaping that weight onto their shoulders…
2/10 treasury spread (while) red/green ED spread (green)
OTHER MARKET THOUGHTS/ TRADES
During the press conference, with respect to housing, Powell mentioned that the difference now is that credit underwriting this time around was a lot more stringent. Certainly, that may have been the case for housing, but many other capital allocations were lax and misguided. As tweeted by @ArifHozef: “Everything is an extension trade now. Previously “yield to call” bonds now trading to maturity. Home flippers forced to pivot to land-lording. Everything is ageing in place.”
A company called Opendoor (OPEN) reported last week a net loss of $928 million in Q3, more than 17 times what it lost in Q2. As one article noted, “Opendoor has become the poster child for a housing market slowdown.” This is a company that buys and sells homes. A flipper. It closed Friday -13% at 2.02, having been over 24 a year ago. Carvana (CVNA) has the same model with cars. It fell 39% Friday to 8.76, having been over 300 one year ago.
Sam Zell last week warned of a possible ‘liquidity crisis’. Before covid consumed everything, the Fed spent a lot of time analyzing the repo rate surge of September 2019. On 9/17/19, with the FF target 2.00-2.25% and SOFR around 2.2%, the overnight repo rate rocketed to 10% forcing emergency measures to get it back under control. Treasury last week revised the Q4 borrowing schedule to $550 billion from $400b. Japan’s holdings of US long-term treasuries have declined by $100 billion so far this year as it maintains the 25 bp JGB cap. Implied vol declined hard in the wake of the FOMC meeting and employment report, but risks remain.
STRADDLE DECLINES: On Nov 1: contracts and settles.
EDH2 9468.75^ 47.75, EDH4 9537.5^ 138.25, 0EH 9537.5^ 77.5, 2EH 9600^ 77.5 and TYF 111^ 3’04.
By Friday Nov 4:
EDH3 9468.75^ 42.25, EDH4 9525.0^ 129.0, 0EH 9525.0^ 71.5, 2EH 9587.5^ 71.5 and TYF 110.5^ 2’42.
| 10/28/2022 | 11/4/2022 | chg | ||
| UST 2Y | 442.0 | 464.6 | 22.6 | |
| UST 5Y | 419.0 | 432.0 | 13.0 | |
| UST 10Y | 400.8 | 415.0 | 14.2 | |
| UST 30Y | 413.0 | 424.3 | 11.3 | |
| GERM 2Y | 193.9 | 212.8 | 18.9 | |
| GERM 10Y | 210.3 | 229.5 | 19.2 | |
| JPN 30Y | 146.0 | 155.5 | 9.5 | |
| CHINA 10Y | 267.5 | 270.6 | 3.1 | |
| SOFR Z2/Z3 | -12.5 | 16.5 | 29.0 | |
| SOFR Z3/Z4 | -67.0 | -78.0 | -11.0 | |
| SOFR Z4/Z5 | -17.5 | -28.5 | -11.0 | |
| EUR | 99.65 | 99.84 | 0.19 | |
| CRUDE (CLZ2) | 87.90 | 92.61 | 4.71 | |
| SPX | 3901.06 | 3770.55 | -130.51 | -3.3% |
| VIX | 25.75 | 24.55 | -1.20 | |
https://therealdeal.com/2022/11/03/opendoor-posts-1b-loss-as-market-slowed-faster-than-expected/
Maybe not today, but there will be a negative payroll number next year
November 4, 2022
–It might not be captured in today’s data, but there are widespread reports that a powerful engine of the US economy is about to announce massive layoffs. Yes, Twitter.
–From FT today: ‘China’s central bank struggles to force tech groups to share user data with state.’ I guess that’s another example of China lagging the US.
–Finally, from ZH, a story summarizing Maersk’s Wednesday conference call: “Maersk has lowered its estimate for 2022 global container demand to minus 2% to minus 4%, down from plus 1% to minus 1% in early August. “Clearly, the risks are to the downside going forward,” said Skou.” See chart below from WSJ on peak world trade…
–Continuing notable adjustments following the FOMC. New high in SFRZ2/Z3 at 20.5, the highest since early June. One week ago on October 27 this spread was negative 22.5, a swing of 43 in a week! FFF3/FFF4 settled 44.5 vs -5 one week ago, nearly half a percent swing. The market clearly took Powell’s messaging to heart, specifically ‘no pause’ and ‘higher for longer’. However, in taking this policy at face value, the market also fears a hard landing, resulting in eventual ease. For example, the red/green eurodollar pack spread settled at its lowest ever level -62. In 1989 it had gotten as low as -36 and in 1995 -18.5.
–On a related note is the 2/10 treasury spread. At the end of the day it was -57, just edging out the low from April 2000 of -56.0. In 1989 2/10 had printed just under -44 (this at the same time as the red/green ED low spread -36.0). The hints being projected from these spreads may not ultimately be right, but the current forecast is a very hard hit with respect to growth. By the way, further back in history in 2/10, a low of -170 in 1981, and -240 in 1980.
–Today’s news of course, features the employment report. The rate is expected to tick up to 3.6% from 3.5, with Avg Hourly Earnings annualized at +4.7% vs last of +5.0%. NFP expected 195k.
https://www.zerohedge.com/markets/end-era-profits-finally-peak-shipping-giant-maersk
We have some ground to cover
November 3, 2022
–Powell’s catchphrase was “we have some ground to cover”. EDH3/M3 settled at a new high of -0.5, having recently been as low as -10.5, and SFRH3/M3 at 0.0; pricing for possible easing in Q2 is getting squeezed out. On the other hand, more deferred calendars made new lows. For example, SFRM3/SFRM4 settled -83.5, so while Powell says more to come, the market is interpreting that to mean that easing will surely follow. Powell repeated these messages a couple of times: “…very premature to be thinking about pausing”… “ongoing rate increases are still appropriate”. He also said that it’s tough to make the case that the Fed is too tight [but a new low in 2/10 at -51 is making exactly that case]. Timiraos asked, “…with Core CPI at or near 5%, does the Fed have to move FF above that rate?” Powell deftly sidestepped that one…but emphasized “we will stay the course until the job is done.” Stocks were shellacked, SPX -2.5% and Nasdaq Comp -3.4%.
–On Monday there was a buyer of 20k 0QZ3 9500p for 9.5 on a block ref 9548-ish. Yesterday those puts were exited, sold at 7.0 to 5.5 covered 9548.5, 40k. With SFRZ3 final settle 9532.5 yesterday, the puts settled at the original buy price, 9.5, a harsh Indication of vol being smoked. On Monday the atm 0QZ2 9550 straddle settled 51.5, yesterday the atm 9531.25^ settled 44.75.
–Today, Jobless Claims expected 220k, Productivity, and ISM Services, expected 55.5.
