The Fourth Quarter

Sept 30, 2019

–Stock futures have rebounded (ESZ currently +10.25 at 2974.00) and fixed income is under modest profit taking pressure as the US administration walked back the idea of delisting China shares.  The prospect of the trade war moving into capital flows would be a large escalation, but appears to be sidelined for now.  China 70th anniversary tomorrow comes with a large military parade as Trump faces impeachment.

–Yields were little changed Friday with the curve edging slightly steeper.  Tens ended at 1.675%, down 1 bp.  The dollar continues to press new highs, putting pressure on precious metals.  Chart attached of possible head and shoulders top in gold, with GCZ printing 1494 this morning, right at the neckline.  EUR bounced Friday but is threatening 109 again this morning (currently 109.26).  

–FFF0 settled Friday at 9842.5, a premium of 27.5 over FFV9 at 9815.0, indicating at least one ease at either the Oct 30 or Dec 11 FOMC.  However, the odds according to calendar spreads favor the December meeting.  Oct/Nov FF settled at just -11.5 while Nov/Jan settled -16.0.  In dollars, the lowest one-year calendar remains the front Dec19/Dec20 at -50.0.  In Short Sterling, Dec19/Dec20 settled Friday at -18 bps, testing the low of -19 in early Sept.  

–Today’s news includes Chicago PMI which was sub-45 two months ago, rebounded to 50.4 last month and is expected 50.2.  

–Quick recent historical note, Q4 last year was a disaster, kicked off by Powell’s Oct 3, 2018 “long way from neutral” pronouncement and accentuated by QT ratcheting up to $50 billion per month.  SPX very close to the same levels as last year at this time, but now we’re looking at another round of QE and the neutral rate being a long way off in the opposite direction.  Good for risk assets?  Or are other negative catalysts lining up?

Crowding Out

Sept 29, 2019 – Weekly
[Note: due to a change in hosting, charts are temporarily not being displayed]

WINSTON: Hey, Ray. Do you remember something in the Bible about the last days, when the dead would rise from the grave?

RAY: I remember Revelation 7:12. And I looked, as he opened the sixth seal, and behold, there was a great earthquake, and the sun became as black as sackcloth. And the moon became as blood.

WINSTON: And the seas boiled and the skies fell.

RAY: Judgment Day.

WINSTON: Judgment Day.

RAY: Every ancient religion has its own myth about the end of the world.

WINSTON: Myth? Ray, has it ever occurred to you that maybe the reason we’ve been so busy lately is because the dead have been rising from the grave? 

–-Dialogue from Ghostbusters

When I was a kid, there was a lot of talk about “crowding out”.  No, I am not talking about manspreading.  Crowding out referred to the idea of government getting so large, especially at full employment, that it essentially crowded out the private sector in terms of new investment.  I googled it and there are no recent articles, just a few educational videos and a paper written in 2010.  The short educational video I watched (linked below) uses a cute graph plotting supply and demand for funds, and assumes that increased gov’t demand plus existing private demand shifts the curve upward and to the right, thereby raising rates which increases savings and decreases private consumption.  The Mercatus from 2010 paper cites Keynes in The General Theory:

Government borrowing can crowd out private spending and investment in a number of ways.  Consider first, the most extreme case in which gov’t borrowing has the exact same effect on the economy as gov’t taxation.

Borrowed money must eventually be paid back.  And because of this, some taxpayers may view gov’t borrowing as delayed taxation.  If so, these taxpayers will spend less today to save in anticipation of paying higher taxes in the future.  Accordingly, defcit-fianced spending is equivalent to tax-financed spending: it induces people to spend less and save more.

In many ways this is the Lacy Hunt (Hoisington) philosophy (and I am bastardizing it here), that gov’t spending’s marginal gain to the economy lessens to the point that ultimately, lower inflation and interest rates are the result.  Defunct economist indeed.

I read a couple of papers in the last couple of days, one by John Mauldin and the other by Ben Hunt.  The underlying theme in both is, ‘what if we’re approaching the cusp of a great change in debt dynamics?’  I loosely am referring to it as Judgment Day.  Mauldin calls it the Great Reset.  Strauss and Howe, the Fourth Turning.  Ben Hunt as the Fourth Horseman that can lay waste to financial markets and portfolios: inflation.

Ben Hunt employs a fascinating tool to quantify, or at least capture, the current narrative and its interconnectedness.  It’s AI that scans all Bloomberg articles and plots certain phrases and references in both time and connection.  I can’t do justice to the methodology here, but I will use a powerful example from his latest missive (linked below)

Okay, a bit of a comment. 25 articles talking about the federal budget deficit versus 2,200 talking about inflation over the same 12 month period from the same financial media source. I am not making this up. There is ZERO narrative creation around austerity in the United States. ZERO. And as long as that’s the case, the political dynamic for inflationary debt-be-damned policies is unstoppable.

Things Fall Apart (Part 3)

And it’s here that I will paraphrase Winston Zeddemore from above: “…has it ever occurred to you that the reason we’re so busy is that the gov’t IS crowding out private investment and pressuring rates higher which then requires Fed intervention?” How would we know that if we saw it?  Well, we might see it with something like the recent repo spike.  There is an expanding edifice of government debt that needs to be financed, and sponsorship in the form of foreign central bank buying seems to be dwindling.  Any more clues?  Maybe we see it in the deceleration of Core Capital Goods orders since the 2018 tax bill (far right side of St Lois Fed graph below). Maybe it’s evident from the leading indicator Chemical Activity Barometer (second chart, see footnote** and thank you to Macro Chat member that posted). This, from BBG after Friday’s data:

The durable goods report for August is technically a beat relative to consensus, but the innards of the data suggest further softness in underlying private-sector capital spending intentions in the third quarter. Volatile categories, including defense orders, boosted the top line well above consensus expectations, while core capital goods orders were soft for a second month.

https://fred.stlouisfed.org/series/NEWORDER#0

https://www.americanchemistry.com/CAB-vs-Industrial-Production/

Chemical Activity Barometer

I know that there are a lot of technical and regulatory reasons that repo spiked.  I know that the NY Fed took aggressive action and got the Fed Effective EFFR and SOFR back down to 1.85% by the end of the week. October Fed Fund contract settled exactly at 1.85%, 98.15.  But another Ben Hunt observation is worth mention, and that is, the EFFR is where the Fed SETS a rate and repo is where it TRADES.  Is all financing limitless, as some proponents of MMT seem to imply? Corporate spreads remain tight, but episodes like the WeWork flame-out indicate that there are some limitations on the gullability of capital. Is that why some of the dealmakers took it on the chin Friday? (KKR down  7%, Blackstone down 4.6%).  

Here is where a dollop of the recent political drama seeps in.  Typically, I avoid the flashpoints of political discussion, and carefully avoid triggering so I will try to tread gently here.  The commie leftist sociopaths that want to strip assets from anyone who has worked for them are gaining ground on the religious right xenophobic wingnuts that fear all food besides apple pie. Said another way, what if Biden’s issues have shifted the entire political probability curve to the left?  Now you know, and I know, that debt never has to be re-paid, it simply has to be rolled.  However, what if the shift to the left and more taxation is working as Keynes suspected and is further accentuating the decline in capex?  What if some corporate debt can’t be rolled at favorable rates? 

To avoid the perception that they are losing credibility on funding, the Fed will likely lean much more aggressively towards easy policy.  Like everything else, it’s short term risk/reward vs long term possible distortions.  The strong dollar environment accentuates this bias; DXY is strongest it has been since May 2017.  According to an Inflation Outlook paper by Enduring Intellectual Properties ( enduringip.com ), yoy M2 growth is 5.6%, the highest since July 2017.  This is not the conclusion of Enduring, but I think there’s a risk the Fed may be more successful in manufacturing inflation than it hopes.  If so, and of course, timing is key, the curve should steepen. 

Important data this week includes Mfg ISM and prices which were both quite weak last time at 49.1 and 46.0.  The former is expected to rebound to 50, but no improvement is expected on prices.  Employment report is Friday with NFP also expected to bounce to 145k from 130k last.  YOY earnings +3.2%. 

Fed speakers include Clarida late Thursday on the outlook for the economy, and Powell on Friday afternoon, Perspectives on Maximum Employment and Price Stability.  Quarter end on Monday. 

	9/20/2019	9/27/2019	chg
UST 2Y	169.2	162.2	-7.0
UST 5Y	163.0	155.1	-7.9
UST 10Y	174.4	167.5	-6.9
UST 30Y	218.7	212.5	-6.2
GERM 2Y	-71.9	-77.0	-5.1
GERM 10Y	-52.1	-57.3	-5.2
JPN 30Y	35.3	31.8	-3.5
EURO$ Z9/Z0	-46.0	-50.0	-4.0
EURO$ Z0/Z1	-8.0	-8.0	0.0
EUR	110.19	109.42	-0.77
CRUDE (1st cont)	58.09	55.91	-2.18
SPX	2992.07	2961.79	-30.28
VIX	15.32	17.22	1.90

https://www.mercatus.org/publications/regulation/long-run-we%E2%80%99re-all-crowded-out

https://www.americanchemistry.com/CAB-vs-Industrial-Production/

**ACC’s Chemical Activity Barometer helps anticipate peaks and troughs in the US economy

Impeachment sparks a flight INTO the dollar?!?

Sept 27. 2019

–The dollar index settled at its highest level since May 2017 as EUR posts a new low testing 109.  Economies with dollar based loans are likely to encounter stress, though effects appear minor thus far.  Stocks slightly weaker due to impeachment uncertainties.  WeWork was downgraded to ‘hoping to survive’ as the company halts all new lease agreements.  Rates eased yesterday, with tens down 4.5 bps to 1.685%.  Reds through golds up 3 to 4 bps.  Oct/Nov and Nov/Jan FF calendars little changed; both are indicating around 50/50 odds of an ease at the Oct and Dec FOMC meetings; slightly more likely in December.  FFF0 settled unch’d at 9840.0, 27 bps above FFV9 so the market is sure of at least one more cut prior to year end.

–New buyer yesterday of 10k EDZ0 9900c for 14.0 ref 9853.0; settled 13.75 vs 53.  Not a particularly large trade, but since I have cited the EDZ0 9800/9900 risk reversal, worth noting.  The 9800p settled 7.75, so the rr settled 6.0 for the call.  EDZ9/EDZ0 remains the lowest one-year calendar at -51.0, down 1.5 on the day.  A bias toward lower rates continues.

–News today includes Personal Income and Spending expected +0.4 and +0.3, with the Fed’s preferred measure of inflation, Core PCE prices expected 1.8%.  Durables expected -1.0% with Core capital goods orders expected 0.0.  Michigan Sentiment also out, perhaps important given a weak consumer confidence reading last week.  Clarida speech yesterday again brought up the idea of a change in policy that would let inflation run above target in an effort to ‘make-up’ for previous shortfalls. 

Funding Issues Gaining Importance

Sept 26, 2019

–Rates jumped yesterday, more than reversing Tuesday’s fall as stocks reacted positively to Trump releasing the Ukraine call transcript.  In euro$’s reds through golds fell 9 to 10.5.  The ten year yield likewise rose 10 bps as the five year auction was slightly soft; sevens auctioned today.   While Fed officials are mostly shrugging off the repo turmoil – Bullard referred to it as a MICRO economic issue and Brainard said it was due to a confluence of technical issues – the NY Fed increased the size of repo operations to $100 billion from $75 billion on daily and $60 from $30 on term ops.  Outside of the Fed, experts are suggesting more: ex-NY desk head Brian Sack and Joseph Gagnon say the Fed should explicitly target repo and buy $250 billion treasuries.  QE and/or a standing repo facility will probably be announced in October.

–Funding in a more general sense seems to have become a larger issue.  For example, Goldman is cutting exposure to Softbank after the WeWork fiasco.  Softbank is trying to secure funding from employees, the Saudis are pressuring oil elite to invest in Aramco.  At the same time, Brainard said leverage loan covenants have “weakened notably”.  

–Worth a mention is that Sabine Lautenschlager resigned from the ECB due to her disagreement with the need for more stimulus (is Lagarde ready for the hand-off?) and Kuroda is citing overseas weakness as a potential reason for increased stimulus.  The political divide in the US seems to be spilling over into central bank politics.  In a world of low yields and reduced returns, cash flows aren’t enough to cover funding needs.

–Q2 GDP today expected 2%.  Jobless Claims also released.  7 year auction.  

–Call buying and adjustment prevalent in ED yesterday.  EDZ0 9800/9900 risk reversal settled 4.5 for the call with futures exactly in the middle at 9850; around 44 to 45 delta, it had traded 5.5 ref 9852.5 a couple of days ago.  

Eat A (im)Peach

Sept 25, 2019

–Stocks and yields fell yesterday as Speaker Pelosi opened formal impeachment proceedings.  Tens fell 7.6 bps to 1.64% in front of today’s five year auction and tomorrow’s 7-year.  On the euro$ curve, reds led the way, closing +9.375 bps.  Greens through golds were up 8 to 9.  Volume relatively light but there was some noticeable call buying in the front end.  EDF0 9900c 2.5 paid for around 60k v 9836.0 in EDH0 (appears exit as OI fell 27k).  Other new buying included EDZ9 9812/9837cs which settled 5.25  vs 9804.5, OI +21 and +24k.  The peak contract is still the 8^th quarterly, EDU21 which settled 9871.5, a bit more than halfway back from the 9/4 high 9895.5 to 9/13 low 9843.5.  This 52bp move took just 7 sessions.  TYZ also just above the halfway back level at yesterday’s settle of 130-23.  Implied vol firmed with prices. 

–FFV9 settled 9812.0 with concerns about funding pressure continuing.  April 2020 FF settled exactly 50 bps higher at 9852.0 with four FOMC meetings in that time frame.  FFJ0 was up 8 bps on the day! 

–The question going forward is whether the impeachment hearings will sap market confidence.  Yesterday’s Consumer Confidence already showed a crack, at 125.1 vs 135.1 last.  If a fall in equities spills over into a weakened economy, I can’t imagine that it works to the Dems favor come election time.  Bitcoin was down 17% yesterday and is stable this morning with the Sept contract 8350.  That leaves gold as the safe haven winner yesterday, closing at the 61.8% retrace from early Sept high to mid-Sept low.  GCZ9 settle yesterday 1540.20. 

Odds and ends

Sept 24, 2019

–Markit Composite PMI for the US was 51.0, a slight improvement over last month at 50.7, but still near the low since 2016.  European data was weak as well, sending yields sharply lower in the early part of the session with the green euro$ pack (3rd year) up 11.5 bps at the high.  Profit taking ensued, and net gains were shaved in half.  In euro$’s reds +5.25, greens +5.5 and blues +5.625.  The ten year yield fell 3.8 bps to 1.706%.  Oct/Nov FF spread settled -13.0, unchanged from Friday, indicating around 50/50 odds for another 25 bp cut at the Oct 30 FOMC.  Fed effective on Friday was 1.90% and FFU9 settled 97.95.  If EFFR is 1.90 the rest of the month then final should be around 97.9525.  In other words, the market isn’t overly concerned about a huge qtr end spike.   Implied vol was firm.

–Although not a large trade, EDZ0 9800/9900 risk reversal is somewhat interesting; 4k sold at 5.5 and 6.0 as EDZ0 was trading 9852.5 to 98.535.  Settled 5.0, call over, vs 9851.0, 13.5 call, 27 delta and 8.5 put, 22d.  Skew heavily favors calls, even as EDZ9/EDZ0 calendar approaches -50 (settled -48.5, -2.5 on the session).  In other words, there is a decent amount of ease expectation already built into the curve, but the fear remains concentrated on the idea that a market jolt sends rates down hard and fast, while downside is limited in a world of negative rates.  In tens, there was a buyer of TYX 130/131 c 1×2, paying 5 for the two legs.  This came back down and settled 1, 53 and 27, with a positive delta of 12.  The thought here is that vol will jump on moves to lower yields.  Nov expiry is 25 Oct, and there are many possible catalysts in that time frame.  

–Volume was light yesterday and will likely be the same today.  Two year auction; w/i was 1.66/1.655 at futures settlement.

I don’t like Mondays

Sept 23, 2019

–Flash eurozone Mfg PMI fell to an 83 month low of 45.6 from 47.0 in August (Mktwatch).  S Korea exports for the first 21 days of September are down 21.8%.  EUR is making a run for new lows, now 1.0971.  US rates are lower this morning.with TYZ currently 130-06.  

–Reports indicate that damage to Saudi oil processing will take longer to repair than first anticipated.  Deterioration with Iran appears to have edged out China/US trade with respect to the news cycle, but the Chinese delegation’s cancellation of an agricultural trip to Montana on Friday was taken as a negative sign for talks and caused a weak close in SPX.  

–The short end has responded positively to the NY Fed’s announcement of term repos over quarter end.  This week treasury auctions 2, 5 and 7 year notes which will settle on Sept 30.  Now it’s about the interplay between rate cuts and a new round of QE, and it’s also about potential QE and its impact on risk assets.  

–Rosengren on Friday cited WeWork as a risk to financial stability, in that a run on commercial real estate could be accentuated.  Not to worry, the soon to be deposed CEO Adam Neumann said that WeWork is recession-proof.  I guess we’ll see how that plays out.  

–The peak on the euro$ curve is now the eighth quarterly contract, EDU21, at 9856.5.  On Sept 4, the high settlements for this cycle occurred at a price of 9894.5 (EDM21 and EDU21).  I anticipate an eventual re-visit of those levels, but I think the peak part of the curve may move forward slightly to the 6th and 7th contract slots.  

Pottersville

Sept, 22, 2019 – Weekly comment

There was a lot packed into the past week.  It started with the jump in oil prices as a result of attacks on Saudi infrastructure, featured a surge in the repo rate catalyzed by a corporate tax date which revealed a shortage of reserves, encompassed the FOMC rate cut, and ended with the announcement of quarter-end term repos by the New York Fed. 

Yields, which in the beginning of September had bounced hard off the new lows set in late August, eased last week, with tens falling just over 15 bps to 1.744%.  The thirty year bond fell over 18 bps to 2.187%.  WTI crude rose 6% (CLX9) and SPX fell half of one percent.

In my note Wednesday morning (pre-FOMC) I said that the Fed had NOT lost control of money markets, citing a speech in April by NY Fed desk SVP Lorie Logan which had foreshadowed the eventual need for balance sheet expansion.  Here is a key excerpt: 

As the level of reserves declines, the Desk will monitor medium-term forecasts of reserves and other indicators of reserve conditions. At some point, the FOMC will decide that the system has reached a level of reserves consistent with efficient and effective implementation.

Once this determination has been made by the FOMC, the Desk will need to conduct outright purchases of Treasury securities to supply reserves in order to offset the general decline in reserves from trend growth in non-reserve liabilities and ensure that reserves remain ample.²¹ In this regard, these purchases will have the same purpose as they did prior to the financial crisis—expanding the size of the SOMA portfolio to accommodate growth in currency and other liabilities. However, the size of these purchases will likely be larger in nominal terms because the growth of non-reserve liabilities is larger. For example, in 2018, currency increased by almost $100 billion, as shown back in Figure 3, compared to average increases of $40 billion a year in the early 2000s before the crisis.

She had noted the end of balance sheet run-off in September, but said the FOMC expected “the level of reserves to be somewhat higher than necessary for efficient and effective monetary policy implementation.”  On this point, the Fed was taken by surprise, just as they were last October, when balance sheet reduction had ratcheted up to $50 billion per month, which was a partial spark for Q4’s asset conflagration. 

Later in the speech she noted that EFFR had risen one basis point above IOER, and talked about the Fed’s close monitoring of repo and reserve balances.  Both she and former head of the desk Simon Potter talk about the “flat” and “steep” part of the curve, in terms of how rates adjust to changes in the size of reserves.  In a speech on Aug 4, 2018. Potter gave a detailed account of the Fed’s framework for monitoring rates and reserves.  He stated,

The target range is an important feature of the FOMC’s public communications, and maintaining federal funds rates within it is therefore taken quite seriously.

In short, the NY Fed’s market desk anticipated issues which might flow from policy and balance sheet changes.  The implementation of repo operations last week was a signal that the Fed was on top of the situation.  Indeed, the Fed Effective (EFFR) had come down to 190 bps on Thursday, having jumped to 230 earlier in the week. In futures, October Fed Funds traded as low as 98.085 before FOMC and repos, but closed at 98.13 on Friday or 1.87%, 26 bps lower than EFFR in the beginning of Sept.  The spread between EDZ9 and FFF0 had risen to 41.5 during the repo rate surge, but came back to end the week at 36.5 (98.000 and 98.365).  This spread reflects “turn of year” pressure and is a libor/ois proxy, and while concerns about year-end funding pressures are evident, they may have peaked.  For a turn comparison, note that EDH0/FFJ0 spread is only 23.5 bps (98.255 and 98.490).

However, upon further reflection, I am actually less confident that the Fed will weather this storm gracefully.  As noted, Logan’s speech was in April.  By late May, Simon Potter and Richard Dzina with a combined 50 years of experience at the central bank, left the NY Fed on the same day due to internal management issues with the new NY Fed President John Williams.  From an American Banker article:

“I’m very surprised that both of them would do this on the same day with three days’ notice,” said Tom Simons, a senior economist at Jefferies in New York. Simons said Potter’s job, as head of the central bank’s open-market operations, is “arguably more important than being president of the some of the regional Fed banks.”

He said the departures are especially worrying for market participants given the uncertainty hanging over the New York Fed’s plan, in conjunction with the U.S. Treasury, to replace the scandal-tainted London interbank offered rate…

I would say that the head of NY Fed money desk is unequivocally more important than ALL of the regional Fed Presidents besides NY.  Ivory tower policy is transmitted to the marketplace by the NY Fed desk.  The desk monitors and implements.  Contrast that to Williams’ large communications gaffe on July 18 when he indicated the Fed might cut 50 bps.  Immediately afterward the NY Fed went to the unusual step of ‘clarifying’ Williams’ remarks, saying they were the outcome of 20 years of academic research.  There’s the problem: Academic vs hands-on market experience and constant market contact. The loss of the latter is a huge problem. Some have now concluded that Williams is a communications liability.  Morale within the NY Fed is said to be declining.  Probably wasn’t helped by Dudley’s going off the reservation with his, ‘Fed should actively pursue policy choices to prevent Trump’s re-election’ Aug 27 op-ed.

On Friday, Potter, at a private speech, said the Fed “may have to expand the central bank’s balance sheet through outright purchases of US Treasury securities, to ensure stable liquidity conditions at the end of the quarter as well as at year-end.”  In an organization that prides itself on concensus and independence, there were three dissents at the FOMC as Bullard opined for a 50 bp cut (apparently lobbying to become the next Fed chief) while Rosengren and George called for no cut.  Rosengren voiced worries about elevated asset prices and market distortions caused by low rates; valid concerns. 

The Fed will likely have to announce, probably at the next FOMC on Oct 30, that QE is back. Former rounds of QE have coincided with stronger equity prices and falling bonds as stimulus was thought to increase inflation expectations and term premium.  With stocks near all time highs in an uncertain environment, it’s not at all clear that prices will react in the same way.  Brexit lies ahead, Mideast tensions are running high, China cancelled an agriculture field trip to Montana, casting doubt on trade talks.  Lagarde takes over the ECB at the end of next month.  I have often thought that markets test new central bank chiefs within a year and thus I had forecast difficulties for Lagarde, but maybe the more pressing concern is the NY Fed and confidence in its ability to both participate in policy choices and implement them.  Key tells will be risk-asset prices, gold and treasury yields.  I think that risks are high that stocks respond poorly over the next month, and that ten year yields re-visit the low of 1.36%.

This week features 2, 5, 7 year auctions in total of $113b raising over $44b in new cash, which will settle at quarter end, Sept 30. 

	9/13/2019	9/20/2019	chg
UST 2Y	180.0	170.4	-9.6
UST 5Y	174.9	162.5	-12.4
UST 10Y	189.6	174.4	-15.2
UST 30Y	237.0	218.7	-18.3
GERM 2Y	-70.7	-71.9	-1.2
GERM 10Y	-44.9	-52.1	-7.2
JPN 30Y	33.5	35.3	1.8
EURO$ Z9/Z0	-40.5	-46.0	-5.5
EURO$ Z0/Z1	-6.5	-8.0	-1.5
EUR	111.57	110.19	-1.38
CRUDE (1st cont)	54.80	58.09	3.29
SPX	3007.39	2992.07	-15.32
VIX	13.74	15.32	1.58

https://www.newyorkfed.org/newsevents/speeches/2019/log190417

https://www.newyorkfed.org/newsevents/speeches/2018/pot180803

https://www.americanbanker.com/articles/ny-fed-loses-top-officers-including-potter-in-rare-double-exit

New high in HH Net Worth

Sept 20, 2019

–A skim of morning headlines underscores continued official/gov’t responses to sluggish conditions: China cut rates as expected.  India cut taxes by $20 billion, sparking a 5% jump in SENSEX.  Saudi Arabia strongly advising wealthy families to invest in Aramco IPO (can’t put it in a new “Vision” fund if it’s recycled back into oil, which means that new cash injections into WeWork will be strangled).  In terms of global growth, the OECD downgraded its forecast to 2.9%.

–Slow action Thursday with yields drifting lower by 1-2 bps.  Tens fell 1.4 to 1.772%.  EDZ9/EDZ0 remains the lowest one-year ED calendar at -49.0.  Implied vol seeped out with ED straddles down 0.5 to 2.0.  Fed effective for Wednesday was 2.25%, but a settle of 9812 in FFV9 suggests the Fed is getting the repo squeeze under control.  (9812 is 1.88%, exactly 25 bps below the Fed effective setting in the first two weeks of Sept, 2.13%). 

–One somewhat interesting note is that blue atm straddles are now settling at or slightly above greens.  Example: 2EH 9850^ 40.5s ref 9856 in EDH22, and 3EH 9850^ 41.0 vs 9849. (the red 0EH 9850^ settled 41.5 vs 9856.0).  Does this modest relative bid in blues indicate the possibility of curve steepening ahead? Or is it just a paring back of green longs…

–April FF, FFJ0 at 9853.5 is 41.5 bps higher than FFV9 with 4 FOMC meetings between the two, so the market has pared back the idea of continued easing.  FFJ0 probably worth a buy on a pullback, I would look at buying some deferred ED calendars against it.  –Fed’s Z.1 report out today. a data set which typically is trumpeted as showing a new high in Household Net Worth.  It will probably be the same this time due to an increase in home prices; equities were essentially flat in Q2.  My headline beats them to it.

Fed steadies the market

Sept 19, 2019

-Fairly subdued FOMC day. The Fed cut 25 as expected and trimmed IOER, but neglected to institute QE.  The NY Fed announced a $75b repo operation the third day in a row for this morning to satisfy funding requirements.  The euro$ curve flattened, with EDZ9, H0 and M0 all closing down 0.5, while EDZ0 back rose 0.5 to 2.5.  October FF settled 9811, but quickly traded down to 9810 after settlement, a signal that funding issues linger.  I had calculated a final settle of 9796 for FFU9 on an ease, but it stubbornly remains 3 bps lower at 9793.  The market wants QE and buybacks.  Powell referred to “organic” balance sheet growth, but that’s not satisfactory.  It’s possible that QE could be re-started before the next FOMC if quarter-end is sloppy.  MSFT obliged on the buyback part with a program of $40 billion.  FDX plunged 13%, supporting the narrative of slower global trade and growth, yet UPS and EXPD remain close to recent highs. 

–Implied vol eased.  EDZ9 9800 straddle eased to 22.5 from 24.5 on Tuesday and EDH0 9825^ from 36.5 to 34.5.  Late buyer of 20k EDZ9 9825/9837/9850/9862 c condor for 0.75.    Nov FF settled 9822, so the market still sees odds for another ease at the end of October at around 40% (assuming a new Fed Effective of 1.88%).  

–Today’s news includes Philly Fed expected 10.5 vs last at 16.8.  Jobless Claims, Leading Indicators and Existing Home sales, expected 5.38m, round out the data.  October treasury options expire Friday. 

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