WIN (Whip Inflation Now)
Feb 10, 2022
Whip Inflation Now was a 1974 attempt to spur a grassroots movement to combat inflation in the US, by encouraging personal savings and disciplined spending habits in combination with public measures, urged by U.S. President Gerald Ford.
Currently the US Gov’t is the number one undisciplined spender!
–CPI today expected 7.2 or 7.3% yoy, vs 7.0% last, which was the high since the early 1980’s. By 1986 it had fallen to 1.1% then shot back up to 6.3 in 1990. So whether it’s 7.3 or 6.8 it’s still at 40 year highs. More importantly, real rates across the curve are extremely negative. Inflation will almost certainly begin decelerating as the year advances, but consumer behavior has changed, and businesses have become accustomed to pushing through wage and price increases. It’s gotten to the point that central bankers are suggesting that workers not ask for large pay raises: “When asked by the BBC whether the Bank[BOE] was asking workers not to demand big pay rises, Bailey said: “Broadly, yes.” He said that while it would be “painful” for workers, some “moderation of wage rises” is needed to prevent inflation from becoming entrenched.” That is simply idiotic. Is the Biden admin handing out crack pipes to central bankers too?
–The 30 year auction also occurs today. Tens went well yesterday, but couldn’t sustain a bid in the afternoon. USH2 settled 153-09 but within 20 minutes had sold off to 152-27, where it is hovering now. At the 2:00 CST settle tens were 1.927 (-2.5 bps) and thirties were 2.231 (-1.7).
–I’ve attached a chart of the green/blue eurodollar pack spread (3rd vs 4th year forward). This spread inverted yesterday with the green pack at 97.82875 and the blue pack 97.83375. So both are at a yield of around 2.17%. It’s the same thing on the SOFR curve, though the prices there are around 99.09 or 1.91%. That is, by the time we’re out to year 3, or 2024, with SOFR 1.91 and the ten year yield at 1.927 there’s no carry. Green/blue had inverted in early December, but all the chatter about a 50 bp hike has helped to re-invert the back of the curve. 2/10 ended at a new low of 58 bps down 3 on the day. Recall at the December FOMC, when asked if he was concerned about the flatness of the curve and the economic implications, Powell noted 2/10s at 75, and said he had no concerns about the curve.
–March beans $16 bushel this morning, a new high. At the winter solstice they were $13.
–Still not seeing a date on the Fed calendar for the Fed’s semi-annual testimony, usually in late Feb. The State of the Union address will occur on March 1.
Red/green euro$ pack spread
February 9, 2022
–Yields ended higher on Tuesday with tens at 1.952%, up 3.6 on the day and just eclipsing the pre-covid high in late 2019 of 1.94%. The thirty-yr ended just under 2.25%. All near eurodollar calendar spreads made new highs: EDH2/EDM2 settled 45.5, up 1.5 on the day. EDM2/EDU2 settled 31.5, also up 1.5 on the day, and EDU2/EDZ2 settled 30.0, up 1 on the day, all new highs. In one-year calendars, EDH2/EDH3 settled 126, up 4.5, in the 5 hike area, while EDM2/EDM3 settled 98.5, up 4.0. However, further back, spreads have flattened to new lows. The attached chart is the red/green pack spread on a rolling basis, currently the average price of the 2023 contracts vs the average price of the 2024 contracts. In 2017 to the end of 2018 the spread compressed as the Fed was hiking, finally bottoming just after the last hike. In this cycle, the decline has been fierce to a new recent low of just under 13 bps. This level is equivalent to the 2018 price when the FF target was 1.25 to 1.75. I guess that makes some sense given that five hikes now seems to be consensus. Front loaded hikes followed by stagnation.
–WASDE crop estimates released today at noon EST. I asked a friend intimately involved with that side of the business and he said the report probably won’t be all that important, but to keep an eye on corn. He said it’s all in the hands of the commercials now, that US farmers have sold out of their inventories and the producers need the supply. ADM and Bunge closed at new highs yesterday; it doesn’t take a genius to see that foodstuffs are in a bull market.
–Ten year auction today. I’ll begin noting which eurodollar contract is closest in yield to tens. EDM’23, the sixth quarterly, has a yield of 2.03% (price 9797.0). Tens yield 1.95%.
Molecule crisis?
February 8, 2022
–This morning tens are back at late 2019 levels at 1.94%….pre-covid. The ten-yr swap is right at 2%. As of late yesterday, yields were a bit lower, with tens 1.916%. Today we have the three year auction, followed by 10s and 30s Wednesday and Thursday. CPI is Thursday, expected yoy 7.3%, and the WASDE grain report is Wednesday. From a BBG interview yesterday with Jeff Currie, Goldman’s head of commodity research, “I’ve been doing this 30 years and I’ve never seen markets like this. This is a molecule crisis. We’re out of everything, I don’t care if it’s oil, gas, coal, copper, aluminum, you name it we’re out of it.”
–US curve ended slightly flatter yet again. In eurodollars, the spreads from reds back made slight new lows (reds are 2nd yr, greens are 3rd yr, blue are 4th and golds are 5th). Red/green new low at just 13 bps, red/blue new low 14.875, red/gold new low 17.625. Two/ten treasury spread finished at 62. –Feb eurodollar midcurve options expire Friday. At-the-money straddles: 0EG 9825^ 12.5, 2EG 9787.5^ 11.5 and 3EG 9787.5^ 10.5. The fact that red straddles have the most juice shows that the fear is related to near-term central bank policy.
–NFIB Small Biz Optimism expected 97.5 from 98.9. Tends to correlate with Russell 2000, which this year decisively broke through 2021’s tight sideways range.
–Here’s a nice story from the Chicago Tribune, ‘Chicago’s carjacking task force to be staffed 24 hours a day amid a rise in violent crime’. There’s actually a carjack task force. That would be a good name for a band. How about no bail and jail?
Huge NFP print leads to huge straddle prices
February 7, 2022
–NFP of 467k when several shops were forecasting a negative number sent yields soaring higher. Tens rose 10.6 bps to 1.928%, while the 2-yr jumped 13.4 bps to 1.322%. Near eurodollar calendars made new highs, for example the front EDH2/EDM2 settled +5 at 44.0. EDU2/EDZ2 had a new high settle at 29.0. Tightening fear is concentrated in the near contracts. EDM2 settled 9895.5. A few weeks ago someone bought EDJ 9900/9887.5 put spread for 1.0. I thought it was a waste of premium but it’s now in the money. Straddle levels are extraordinarily high. Last week there was a buyer of the atm 9912.5^ in June for 28.0. On Friday, the 9900 straddle settled 31.0 vs 9895.5 and the 9912.5^ settled 34.0. After the December FOMC there had been a large seller of the then at-the-money 9900^ at 50.5. In less than two months the contract has fallen 65 bps and the current 9837.5 straddle is 61.5. The rapid central bank pivot to hawkishness has blown up many strategies.
–Many curve measures ended at new lows. 2/10 fell 2.8 to 60.6. 5/10 down 4.4 to 44.2 and red/gold euro$ pack spread down 3.5 to just 18.125. EDH3/EDM3 still has a spread of 15.5 (9817.5 and 9802.0) but if we look at the four contract packs starting EDM23 and EDM26, then red/gold would be just 10.75.
–This week brings auctions of 3s, 10s and 30s starting tomorrow.
Awesome
February 6, 2022 – Weekly Comment
The transition away from the global benchmark for short term rates, upon which millions of contracts are based, is in full swing. The Libor rate, which contains a credit component, was subject to manipulation by bank traders. After much sanctimonious outrage, the regulators determined that SOFR, the secured overnight funding rate, would be the appropriate replacement.
Last week a federal appeals court reversed the convictions of two Deutsche Bank traders who had previously been found guilty of rigging libor settings. (Maybe shenanigans aren’t quite as easy to prove as it appeared). At the same time, SOFR options are now beginning to trade on the CME. These options are mostly trading on Blocks which means more of a call-around market rather than liquidity being transparently provided in the pit or on screens. In my opinion, it ends up costing end users in time, liquidity and competitive pricing. There. Fixed it. Awesome.
Big rate moves across the globe last week. In treasuries, yields were up 15 to 17 bps, 2s +15.4 to 1.322%, 10s +15.1 to 1.928% and 30s +14.7 to 2.228%. In the front end, the trend of pricing front-loaded hikes was exacerbated by the ECB’s press conference and the US jobs report. FFF3 settled 9856.0 or 1.44% (up 15.5 bps on the week!) as compared to the current Fed Effective Rate of 8 bps. So 136 bps of Fed hiking is being priced, 5 or 6 quarter pct moves (if that’s still the appropriate increment), by year end. In Eurodollars, EDH2/EDH3 one-year calendar spread rose 10.5 bps on the week to a new high of 122. However, the forward one-year calendar, EDH3/EDH4 actually declined by 3.5 on the week to just 30.5, while EDH4/EDH5 rose 1 to 2.5. Central banks have suddenly found inflation religion and want to hike NOW. This dynamic was fiercely expressed in Schatz which rose 36 bps on the week to negative 24.7 bps. But markets are reflecting trepidation on resulting growth prospects a year or two out…
On the Euribor curve, ERH2/ERH3 exploded from 45 to 88.5 Friday to Friday! However, ERH3/ERH4 declined 3 bps from 37.5 to 34.5, and ERH4/ERH5 plunged from 12 to 3. The back end of the Sonia futures curve has been inverted for quite some time, and that’s where this week’s moves were most dramatic. SFIH2/SFIH3 increased from 82.5 to 86.5. But SFIH3/SFIH4 tanked from -1 to -14, and SFIH4/SFIH5 from -16 to -17.5.
The pricing pressures that our central bankers are sniffing out were apparent, well, everywhere really, but this week a glance at energy markets provided evidence. CLH2 surged to a new high of 92.31/bbl, up 5.49 on the week. Of course, the one-year forward CLH3 was up only 3.00 on the week, from 75.68 to 78.68. Remember less than two years ago front WTI contract traded negative 40.00 because there was no place to put it? That was awesome, wasn’t it.
CPI is released Thursday, expected to show a yoy gain of 7.3% vs 7.0 last month. Bbg Commodity sub-index closed at a new high of 65.45 this week. On Feb 5, 2021 it was 50.41, so a rise of just under 30% on the year. There are widespread reports of fertilizer shortages and huge increases in farming input prices. World Agricultural Supply and Demand Estimates (WASDE) on Wednesday.
The employment report provided a selling catalyst on Friday. On Monday WH press Secretary Jen Psaki gave a detailed warning that employment data could be quite weak due to the omicron variant sneakily coinciding with the payroll survey week. ADP corroborated the story with a huge miss of -301k, released on Wednesday. The previous month’s number was also revised lower. But then Friday’s payroll report showed a gain of 467k jobs with the previous month revised up from 199k to 510k. So, a net swing of about 650k from what had been expected this month and reported last month. That’s awesome, isn’t it. Maybe we should have the crack libor investigative team look into THESE small discrepancies.
I’ve previously written about the Landscape of Fear, which postulates that apex predators instill fear into the lower tiers which use more caution when feeding etc. It leads to a healthier and more diverse ecosystem. We’re currently getting an injection of fear into financial markets. Not enough to really change behavior yet, but it’s starting to get close. Maybe markets will be healthier, though less “efficient”, when some inventories are kept on hand, when end supplies are from a more diverse chain. Maybe higher rates will provide a hurdle for capitalism, where the stupidest ideas are weeded out, and zombies fail… perhaps freeing resources for better uses.
OTHER MARKET THOUGHTS/TRADES
According to the latest TBAC financing table, auctions this week consist of $50 billion in threes on Tuesday, $37 billion in tens on Wednesday and $23 billion in thirties on Thursday. Of this $110 billion, about half is new funding. Easier or harder to digest at higher yields? More importantly, as the surge in short rates removes forward positive carry, where does the buying come from? WI ten year yield was 1.927% late Friday. EDM’23 settled 9802.0 or 1.98%. So in sixteen months carry is gone? Awesome.
The Fed’s semi-annual testimony to Congress is usually at the end of February, though I still don’t see it on the calendar.
| 1/28/2022 | 2/4/2022 | chg | ||
| UST 2Y | 116.8 | 132.2 | 15.4 | |
| UST 5Y | 161.9 | 178.6 | 16.7 | |
| UST 10Y | 177.7 | 192.8 | 15.1 | |
| UST 30Y | 208.1 | 222.8 | 14.7 | |
| GERM 2Y | -60.7 | -24.7 | 36.0 | |
| GERM 10Y | -4.5 | 20.5 | 25.0 | |
| JPN 30Y | 75.4 | 80.2 | 4.8 | |
| CHINA 10Y | 271.1 | 271.1 | 0.0 | |
| EURO$ H2/H3 | 111.5 | 122.0 | 10.5 | |
| EURO$ H3/H4 | 34.0 | 30.5 | -3.5 | |
| EURO$ H4/H5 | 1.5 | 2.5 | 1.0 | |
| EUR | 111.49 | 114.49 | 3.00 | |
| CRUDE (active) | 86.82 | 92.31 | 5.49 | |
| SPX | 4431.85 | 4500.53 | 68.68 | 1.5% |
| VIX | 27.66 | 23.22 | -4.44 | |
from comments by a guy named Paul Morley:
I caught Popper about ten feet away going on stage and said “you’re fucking awesome!” he heard me through the rest of the crowd, took a step towards me and said “no no no man, YOU’RE fucking awesome!” That’s how fucking awesome he is.
“Someday an answer will find us, quite a long shot
But anyway, I think the past the past is behind us
Be real confusing if not but anyway
I put all my hope in tomorrow, it’s gonna be great
I can tell but anyway I see a new, a new day dawning
I like to sleep late, oh, well but anyway”
Normalizing rates as the hinges come off everywhere else
February 4, 2022
–Suddenly the ECB woke up to the risks of inflation which sent the european short end into a tailspin. Wednesday to Thursday changes: Schatz up 12.6 bps from -45.8 to -33.2, and it had been as low as -64 on Jan 26. The bund went from 4.2 to 14.2 bps (it was -7.4 on January 26). The red euribor pack settled down over 20 and was printing -22 late. Looks like a coordinated central bank hike fest, just as economies slow. EDH2/EDH3 made a slight new high of 113.5. But ERH2/ERH3 surged 19 bps to 75.5 and SFIH2/H3 was down a few but still closed 79.5. A least three hikes everywhere.
–Massive TY put selling on Thursday. -15k TYJ 125.5p 15 to 14 (18s OI -5k). -20k TYJ 125.0p 10 (13s OI -3k), -15k TYJ 124.5p 7 (9s OI -1k). -25k TYH 126p at 4 (5s OI -20k). TYH 127p settled +7 at 17, with 260k now in open interest, down 17.6k.
–Payroll report today expected 135k, but there is plenty of chatter of a negative number on the back of ADP and the administration’s cold water hints (…that the Russians have infiltrated the BLS).
–New low settles in both HYG and JNK (Hi-yield ETFs, with yields of 4.14% and 4.39% respectively). Credit problems looming?
–Significant new high in CLH2 (WTI) this morning at 91.73, up 1.46.
–ESH surged after AMZN’s post-futures settlement results, but are now only up 9 at 4478.0.
Virtual evaporation
February 3, 2022
–BOE and ECB today. FB plunged 20% on earnings miss after close, amazingly enough that’s about $175 billion in virtual value. Here’s a good quote from Reuters: “Investors looking at Meta are starting to realize that buying their stock is no longer mostly an investment into their ad platform. Investing in Meta now looks more like a commitment that you believe that the metaverse will replace much of the internet consumer’s experience today.” Flynn Zaiger, CEO of Online Optimism. [doesn’t sound all that optimistic] Twitter also down 4% pre-open and Spotify -5.7%. Bitcoin pressing down toward 36k.
–Once again, new low yesterday in red to green pack spread in EDs. That’s year 2023 to year 2024, and the pack spread settled just 13.625. The initial one-year spread is EDH3/EDH4 which settled 32.5, but the last spread, EDZ3/EDZ4 is just 1 bp.
–ADP was a huge miss at -301k. Jobless claims today expected 245k. Other news includes Nonfarm productivity expected 3.2%, Markit PMI Composite, Service ISM expected 59.5 and Factory Orders, with the Employment report tomorrow. With the White House warning of a weak employment number and ADP apparently confirming, the surprise would now be a stronger than expected figure. There are still 278k open in TYH 127p, which settled 10 with -0.20 delta; settlement is 2 weeks from tomorrow.
–Tens fell 3 bps in yield yesterday to end 1.766%, but futures on the longer end rejected highs that have more or less defined the top end of the range. For example USH high yesterday was 156-17 but the settle was 156-00. The high on Jan 7 was 156-28, then 156-19 on Jan 24.
–Dem NM Senator Ben Ray Lujan is in the hospital recovering after a stroke, but in the short term that means Dems no longer have a margin in the Senate.
Early start before the snowstorm
February 2, 2022
–Stocks higher this morning after Alphabet results. March WTI is holding above 88, near new highs. ADP this morning expected 184k.
–Rates trading was quiet yesterday, with yields edging slightly higher. Tens ended at 1.796% up 1.8 on the day. The eurodollar strip was +1 to -1, but one interesting note is that the red/green pack spread settled at a new recent low of just 15.125 bps. This is the second year forward to the third year forward, average price of the four contracts is 98.19375 in reds and 98.0425 in greens, both under 2%. This spread is consistent with the idea that rate hikes will have ended by some time in the beginning of 2023. I suppose that Federal gov’t debt of $30 trillion can be thought of as a dark cloud over forward economic prospects.
–Exit sale of 80k 0EH2 9862.5/9850 put spread yesterday as shorts continue to pare back positions. The 0EH put spread settled 9.25 vs EDH3 settle of 9838. Position originally bought for 3 to 3.5. Nominal straddle prices are typically higher in greens and blues versus reds, of course, the curve usually has a slope. Currently, nominal straddle prices are essentially equal. 0EH 9837.5^ is 25.5, 2EH 9800^ is 26 and 3EH 9800^ is 25.0. 0EM 9825^ is 47.0, 2EM 9800^ is 47.5 and 3EM 9800^ is 46.5. Again, I think this points to a stagnant curve and a decelerating economy and inflation.
–ECB and BOE tomorrow with the bund finally sporting a positive yield.
Communications
February 1, 2022
–Bostic clarified that a 50 bp hike was not his preferred policy path (then why even bring it up?) noting that he sees three hikes in 2022. There were several large block buys in EDH2 and EDM2 at 9946/47 and 9905.5/07; settled 9949.0 and 9909.5. EDM2 and EDU2 were the only contracts that settled negative on the day, both -1.5, until the last golds. Perhaps unsurprisingly, Bostic’s weekend comments appeared to provide the ideal opportunity for large shorts to be covered: open interest in EDM2 fell 71k, and in EDZ2 by 41k with total ED open interest down 199k. I guess that was all part of the “Fed listens” initiative a couple of years ago, the Fed listens to Bill Ackman.
–Higher than expected inflation data in Germany caused a rout in euribor, with ERM3 and ERU3 the weakest contracts on the strip at -9.5. Schatz (2yr) went from -60.6 tp -52.8 as yoy CPI was 4.9% vs expected 4.4%. Short end curves are following the same playbook, with concerns about front-loaded tightening that will stifle future growth. For example, yesterday ERH2/ERH3 was up 7.5 to a new high at 52.5, while on the back part of the curve ERH4/ERH5 declined from 12 to 8.5. In sonia, SFIH2/H3 is at a new high 85.5, while SFIH4/H5 is negative at -17.0. Inversion on the back end of rate curves is a warning on growth. In the US, EDH2/H3 is 110 bps, while EDH4/H5 is 3.0. Indeed some analysts are forecasting sharp slowdowns.
–The President’s Press Sec’y Jen Psaki yesterday set the market up for a weak payroll number, noting that the survey week coincided with the worst of the omicron variant, and that 9 million people called in sick. The employment report is Friday. Nothing like massaging the data before it even comes out.
Beans in the teens? How about the 20’s?
January 31, 2022
–March’22 soybeans print 1489 this morning, which is a new high for that contract. I believe the all-time high for a front contract was 1758 in 2012. While it’s probably the case that inflation prints will start coming down later in the year, the absolute price for food will likely still be going up. Prices of fertilizer and other inputs have been soaring. The price of DEF, diesel exhaust fluid, a product that diesel users need to meet EPA standards, was up 160% last year. Eventually base effects will bring down inflation numbers, but the cost of living will likely dominate news headlines, making it tougher for the Fed to raise rates quickly.
–Flattening along the back end of the curve continued Friday with all euro$ one-year calendars from EDZ22/EDZ23 back making new lows (Z2/Z3 settle 49.5, down 4.0, while Z3/Z4 is just 3.5, down 1.5). Some calendars in blues have again inverted. For example EDH25/EDM25 three-month spread settled -0.5. Bostic helpfully said in an interview with the FT that a 50 bp hike could come in March. I did not read the interview, so I am sure I am missing some nuance, but it doesn’t really matter. The hint of 50 in a market already beginning to price that way is negative for the curve, which in turn sends the signal that the economy will be slowing. The three years of euro$ contracts from EDH’24 to EDZ’26 are within a six bp difference of 9803 to 9797, right around 2%. These contracts are NOT forecasting an inflationary spiral ahead. I personally think all back rates should be much higher, but a Fed who now has found the old Bundesbank religion is clearly able to inflict damage on an asset-price dependent economy.
–That’s where the Fed stands: at the intersection of higher cost-of-living expenses, spurred in part by energy policies and the gushing fiscal and monetary response to covid, and an economy now accustomed to high and increasing prices of financial assets. They might successfully squelch the latter without doing much to alleviate the former.
