Often Wrong, Never in Doubt
Weekly Comment – July 14, 2019
That’s a YZ saying. “Often wrong, never in doubt.” I don’t know whether he originally made it up, or heard it from someone else, but when he says it over a beer-drinking trading discussion with such obvious relish, it absolutely crystallizes everything about the trading profession and many people that inhabit it.
I had the honor to be invited to Kevin Muir’s (the MacroTourist) + Patrick Ceresna’s podcast called the Market Huddle on Friday. I knew what I wanted to convey, but perhaps muddled the message. That’s why I generally prefer to write, rather than speak. ‘ Better to keep you mouth shut and appear stupid than open it and remove all doubt.’ I think that line is attributed to Mark Twain. Maybe he heard it from YZ first. Anyway, I usually include a few different topics in my weekly note, but this time, I am going to focus on the curve, specifically on 5/30. I know which way it’s going. Higher. And I know where. To 150 for a start. (Currently 78). It started the year at 48, having closed at 36 on Dec 20, the day after the last hike.
Generally, I don’t like to buy things right at the high. On Friday, 5/30 closed at 77.4, near its recent high of 79.8, which is the high of the year. I think it’s going higher. At the very least, in this case, I am going with the year’s trend. I don’t have the position on personally as I don’t trade futures. I am long a small bit of TBT, which is the short bond etf, but that’s the closest thing I have to this idea. These days the compliance people want to include a page of disclaimers on trade ideas. Here’s my disclaimer. I have been certain of many trades over time. Used my own capital to express the view. And been horribly wrong. This could be one of those times. But I don’t think so. Having said that, there is nothing more painful than exiting a loser that you’ve done the analysis on, and added to as it dribbled against you.
On Friday morning, someone checked on the floor, FVU 117 puts 4 times vs USU 152 puts one time. The second I heard it quoted I was saying to myself, YES. That is EXACTLY what you do here. Buy the curve synthetically. Sell FV puts and buy US puts. Then a block posted. 40k FVU 116.75 puts at 11/64’s (117-145) vs 10k USU 151p for 41 (153-07). Just completely obvious. Of course, I didn’t know for sure that it was my way, but it turns out it was. I mean you’d have to be an idiot to put that trade on the other way. Did I just say that aloud? Well, I was thinking it anyway. ** Settles and data at bottom.
I was reviewing a slew of charts for Muir’s podcast. I also skimmed some old central bank stuff. For example Kuroda gave a talk at the Kansas City Fed in 2013, and was talking about the natural rate, and getting to the 2% inflation goal. If you didn’t know it was from 2013 referring to Japan, you’d think it could be from any central banker today, sincerely making the same argument and assuring everyone that 2% inflation is right around the corner thanks to prudent policies and new tools. OK. Japan did get to a high inflation print of nearly 4% in 2014. And then it came right back down and has only reached a subsequent high a bit over 1% in a couple of months since. Last at 0.7%. It’s Einstein’s definition of insanity. Doing the same thing and looking for a different outcome. Never in doubt. Tell me again why there’s a slight fraying in confidence in CBs? I don’t even know what is so magical about this 2% goal. But that’s a long post for another day. Why do you want to keep trying to convince me that losing 2% of purchasing power annually is such a fantastic thing and the path to economic nirvana? I have two words for you…
In the week prior to last, the curve was going bid. Then employment data comes out stronger than expected. They monkey hammered the front end because all of a sudden the Fed MIGHT NOT EASE. In my mind, they HAVE to ease. The important voices on the Fed have more or less said it. And no, I am NOT talking about Bullard. Of course, others including Mester and Harkin and Kaplan have expressed reservations about easing. In the long run, they’re probably right, that additional stimulus may add to imbalances. However, in the short run, if the Fed doesn’t ease at the end of July, we’re going to be looking at some fierce volatility.
Anyway, they flattened the curve in the aftermath of the employment data. 5/30 went from 76 on July 2 to 66 on July 9. If you were long the curve, you were, at the very least, disconcerted. Your inclination might be to exit in front of Powell’s semi-annual testimony. However, Powell went before Congress and said there would be an ease. I always love when people tell me that sort of thing: “The guy said xyz.” And I usually respond, “Did you actually read the testimony? Because I did, and he didn’t say that at all. News bullet headlines can be very selective.” Well in this case, Powell did say they’re easing. No big deal right? It was already priced. Then, at the end of the week, the inflation data came out, a shade stronger than expected. Chicago Fed’s Evans on Friday said a couple of rate cuts could bring inflation to the goal. So what are the ingredients for a steeper curve? A central bank that’s easing. Inflation data starting to perk up just a little bit. A LOT of supply. It’s not rocket surgery. They’re BEGGING you to buy the curve. Yeah, but are there any other clues? Well, the German bund went from a capitulation low of -40 to -20. Oats had a negative yield (Mon dieu, has the world gone crazy?) and then snapped back to positive. 30-yr treasury yields closed at a new recent high of 2.64%, with an outside range in July relative to June, having made a new low of 2.467 last week. Long bond positions have gone bad. Pear-shaped. Ten and thirty year auctions were a bit soft. This ship has turned.
Then on Friday morning, a big guy comes in with the option play. I was talking about it with a friend, and he was asking, well vol is historically low, right? Yeah. What I do (unscientifically) is look at the DV01 of the contracts. And I see that it’s 3.93 FV to one US ($48.5 to $190.6). And then I look at price atm vol of the two contracts. Obviously, bond vol shouldn’t be 3.93x higher. And of course it’s not. Anyway, that vol ratio is currently 2.61. And then I look at the ratios compared to each other. In my observations, if that ratio is below 0.70, as it is now at 0.66, then bond vol is cheap to FV. Where SHOULD it be? I don’t really know. One could look through a lot of history and crunch a lot of data and give you an answer. I’m not going to do that. Because, in our recent interest rate history, there have been a lot of moves, some of them very recent, where people said, “it’s never been here before, this is the time to fade it”. And it keeps steamrolling. Then I look at something like the Gold/Silver ratio and say, hmmm, it’s never been this high before. Maybe I should go the other way. Or I look at something like the Russell/SPX ratio, and say, hmmm, if things are so good then why is this ratio at the 2016 low and within spitting distance of the 2009 crisis low? Maybe this is the trade of the year: Buy Russell, sell SP. All I know, again focused on 5/30, is that you usually can’t put an option trade like the one that occurred for a credit. So, I think it’s attractive. Combined with my curve view, it’s a no-brainer.
Along the same lines, I was in a discussion about the nominal levels of red to blue euro$ midcurve straddles. Just as an example, on Friday, 0EZ 9825^ settled 38 vs EDZ0 at 9830. 2EZ 9825^ settled 36.0 vs EDZ1 9824.0. And 3EZ 9812.5^ settled 34.5 vs 9813.0. Similar futures’ prices, cheaper straddles further back on the curve. Doesn’t the back stuff seem a little cheap on a relative basis? And my friend said,”It’s gamma vs grandma. If you’re short in the backs [like the blues] it’s like grandma punching you. It’s just not going to hurt as much.” Of course, what that pithy little saying meant is, “The Fed’s in play. The front contracts are moving around a lot more. The fronts are what’s driving the curve; the backs are pretty stable. Obviously people are willing to pay more for the protection up front. Makes sense.
But here’s the seed I want to plant. What if the thing that blows up next is the yield in the back end. That, as a friend of mine likes to say, would set the cat among the pigeons. What if the Fed is committing to ‘a couple, two, tree, whacks’ as we like to say in Chicago, just as demand for long dated paper is ebbing? Arguments to that effect can be made on the basis of both technicals and fundamentals. Sometimes things just reverse because everyone has ALREADY committed. We’ll be watching nominal levels of back midcurve straddle levels relative to reds, the value of DXY, US vol levels, and of course, actual yield spreads to monitor this idea.
News this week includes another Powell speech on Tuesday, ‘Aspects of Monetary Policy in the Post-Crisis Era’. Beige Book on Wednesday. Data includes Retail Sales and Ind Production Tuesday, Housing Starts Wednesday, Philly Fed Thursday.
| 7/5/2019 | 7/12/2019 | chg | |
| UST 2Y | 187.1 | 183.7 | -3.4 |
| UST 5Y | 183.9 | 185.9 | 2.0 |
| UST 10Y | 204.2 | 210.6 | 6.4 |
| UST 30Y | 254.6 | 263.3 | 8.7 |
| GERM 2Y | -74.9 | -72.3 | 2.6 |
| GERM 10Y | -36.3 | -21.0 | 15.3 |
| JPN 30Y | 33.4 | 39.0 | 5.6 |
| EURO$ Z9/Z0 | -36.5 | -32.0 | 4.5 |
| EURO$ Z0/Z1 | -0.5 | 6.5 | 7.0 |
| EUR | 112.26 | 112.88 | 0.62 |
| CRUDE (1st cont) | 57.51 | 60.21 | 2.70 |
| SPX | 2990.41 | 3013.77 | 23.36 |
| VIX | 13.28 | 12.39 | -0.89 |
** FVU9 116.75p settled 8.5 with a delta of 21. USU9 151p settled 30 with delta of 22. Expiration date 23-August.
Long end moving to center stage
July 12, 2019
–Yields rose Thursday as inflation data were slightly more firm than expected with Core CPI mom 0.3 and yoy 2.1%. However, the curve continued to steepen with 2/10 up 3.5 bps to 27.1. The flattening move related to the strong payroll report last week has been completely reversed. The market is accepting the idea of a rate cut at the end of this month of 25 bps (FFN/FFQ settled -29.0) and probably another cut in September (FFQ/FFV settled -17.0) but confidence in the longer part of the curve is wavering, as evidenced by the 30 year bond auction yesterday. I’ve attached a couple of charts of 5/30 treasury spread. The top shows that a long term downward-sloping trendline in place since 2014 was broken this year. The sell off associated with Friday’s NFP just re-tested the trend, and 5/30 is now near a new high for the year. The second chart shows a shorter time frame; the low of 33 bps was made in December and it’s been moving higher ever since. I marked the spread at 76.5 at futures settlement yesterday, up 4.5 on the day, but the chart shows a later price of 80 as the bond yield rose 6.9 yesterday to 2.64%. The bottom chart shows the thirty year yield, which bottomed at the beginning of the month at 2.47% and has since surged 18 bps.
–On the eurodollar curve, EDU9/EDU0 and EDZ9/EDZ0 posted new recent highs of -40.0 and -31.0 (both +2 on the day). Therefore, the idea of a more aggressive and concerted easing cycle is losing adherents. it seems now like the market is in the mindset of a few “insurance” cuts and let’s see what happens. And let’s see if the US can easily continue to sell debt as supply increases.
–PPI data today. Also, storm Barry is threatening huge damage to New Orleans. Katrina was in August of 2005.
Heading to lower libra rates. It means ‘free’
July 11, 2019
–Explosive steepener yesterday as Powell highlighted uncertainties and risks to future growth and inflation. The two year note plunged 8 bps to 1.824% while tens were unchanged at 2.06% and bonds actually rose 3.2 bps to 2.57%. On the euro$ strip, whites rose 7.375, reds +4.625, greens +1.5 blues -0.375 and golds -1.875. While these moves were dramatic, they came after a flattening move in the wake of the stronger than expected employment report, so many curve measures are now more or less in the middle of the last month’s range. For example, 2/10 ended at 23.6, up 8 on the day, but right back where it was in the beginning of July, prior to NFP.
–Everything I read in the prepared text solidified the idea of an insurance cut of 1/4%. Business investment is weakening and housing decelerating, with global trade tensions accentuating risks. However, odds of MORE than a 25 bp cut at the end of the month rose significantly. On Tuesday, July/August FF spread settled at exactly -25 bps, but yesterday this spread plunged to -31.25 as Aug FF rose 6.5 bps to 9792.0 or 2.08%. CNBC highlighted the number of times that Powell said “uncertainty” (25x) and the market apparently feels the need to hedge against the chance of 50. Further back, the Nov/Jan FF spread settled unchanged at -12.0, indicating a 50/50 chance of a 25 bp cut at the December FOMC.
–Stocks were, of course, buoyed by the prospect of increased liquidity. Implied vol declined in the front end, for example, EDZ9 9800 straddle went from 32 on Tuesday to 30.5 yesterday.
–Today’s news includes CPI, with yoy Core expected 2.0%. Powell continues his testimony. And the treasury auctions 30 year bonds, which were yielding 2.57% late yesterday, not quite 20 bps above the current Fed Effective rate. Also worth noting is the rally in oil yesterday, as CLQ closed +260 at 6043. It’s up a bit more this morning, due to a draw down in inventories, a storm in the gulf, and an Iranian attempt to stop a UK tanker in the Straits of Hormuz. Would a surge in oil to new highs be inflationary or a risk to growth? Yes. Probably not supportive of the long end of the curve in any case.
Crazy aunt comes out
July 10, 2019
The above quote from former presidential candidate Ross Perot (who walked on yesterday) doesn’t really have the same punch in the written word that it does in video clips, because he seems a little off-kilter himself in some interviews.
–However, the topic of the vast universe of negative-yielding debt, and the amount of debt continuing to be amassed, is gaining traction. This morning’s Drudge Report headline blares: DEBT PILES UP! DEFICIT 25% HIGHER SINCE ELECTION. The story concerns the debt-ceiling limit, and notes that the ‘drop dead’ date has moved forward according to some analysts, because of the concern that corporate tax receipts are softening. Interesting timing, as the treasury auctions tens and thirties today and tomorrow…
–Today of course, Powell begins his semi-annual testimony to Congress. NOTE: Prepared remarks are released at 8:30, an hour and a half prior to his appearance at 10:00. The semi-annual report released Friday will guide the testimony, with concerns about soft capex spending and risks due to global trade.
–However, market action has already signaled direction. Yesterday, yields rose, with tens tacking on 3 bps to 2.061%. Highs in almost all rate contracts were posted the day after the June 19 FOMC. It’s interesting to note that many contracts this week have taken out the lows made on the morning of June 19. In other words, the last FOMC meeting (the minutes of which are due this afternoon) culminated in a ‘blow-off’ top. For example, EDU9 low on 6/19 morning was 9786.5, the high on the 20th was 20 bps higher at 9807, and yesterday’s low was 9785.5. In red Sept, EDU0, the low on the 19th was 9829.5, the high on the 20th was 9856.5 and yesterday’s low was 9826.0. Round trips. Red, green and blue Sept are all at or through the 9825 strike this morning, having been 25 to 30 bps above that strike on June 20, and Friday is the expiration of July midcurves. Also worth noting is that the US ten year yield, having gotten below 2% for a couple of days, now seems to be rejecting the 1% handle. FFF0, Jan Fed Funds, which indicate the end-of-year target, traded as high as 9844.5 on the 20th or 1.555%, a discount of over 80 bps (or 3 eases) from the current Fed Effective. Yesterday’s close was 9822.5.
–July/Aug FF spread settled exactly -25 bps. An ease of 1/4% is baked in the cake for the end of the month, now it’s about positioning, with overly-enthusiastic longs paring back. I would also mention that blues were weakest part of the euro$ strip. closing -3.0.
Quote from a piece that Mauldin highlighted yesterday by Mark Grant:
Pew Charitable Trusts states that the median pension fund assumption, for the State Pension Funds in the United States, is 7.50%. Well, with the Bloomberg Treasury Index yielding 2.00% and the Bloomberg American Corporate Index yielding 3.20% and the Bloomberg American High Yield Index yielding 5.84% you begin to realize that bonds, for the pension funds, have become nonstarters. They are losing investments from the “get-go,” to achieve their median pension fund assumption.
Mark J. Grant, Chief Global Strategist, Fixed Income; B. Riley FBR Inc.
Pre-Powell adjustments
July 9, 2019
–Overall, rates were little changed yesterday with tens slipping 1 bp to 2.032%. However, the curve flattened to new lows, with 2/10 down 1.7 bps to 15.4 and 5/30 down 3.3 bps to 67.8 (having been just below 80 on June 24). Red/gold ED pack spread also notched a new low, falling just over 1 bp to 23.625. This pressure on the curve comes as Powell is set to testify before Congress tomorrow. Today he speaks as well, regarding stress testing.
–FF and euro$ contracts are solidly priced for a 25 bp cut at the end of the month. There are continuous articles about demand for USD funding; the odds of Powell signaling that the Fed may hold fire are extremely small. The curve would be crushed if the Fed does not ease, and DXY would build on recent gains. Inflation targets would move farther away.
–Both fixed income and stocks are lower this morning. Continued weight on both the euro and DB. The dollar is making gains against everything except bitcoin, which is near 13000 this morning. Copper nearing new lows as China/US talks are set to resume. Gold is down 10 at 1390, down 50 from the high print on Wednesday. It feels like deflationary clouds are moving in, but US treasuries aren’t responding, perhaps as auctions loom, with 3’s today, followed by 10’s and 30’s. Exporter South Korea’s won has resumed its slide this month, partially due to trade issues with Japan, but also a signal for global trade.
Market fissures?
July 8, 2019
–Small bounce in fixed income this morning, and a more solid rally in gold, after the NFP inspired sell off on Friday. Payrolls increased 224k, sending the ten year yield hurtling 9 bps to 2.042%, and the red euro$ pack down 12.75 bps. The curve flattened with 2/10 spread down 1.8 bps to a new recent low of 17.1. The data finally dispelled notions of a 50 bp cut at the end of the month, with August Fed funds tumbling 6.5 bps, leaving the spread to July at almost exactly 1/4% (FFN 9761 and FFQ 9786.5). A lot can happen in the next 3 1/2 weeks going into the FOMC meeting, but those who have been emboldened in calling for the Fed to stand pat will be disappointed (including Mester). The market is comfortable with a cut of 25, and Powell has vowed to take ‘appropriate’ action.
–While US stocks recovered some of the early morning sell off on Friday, Asian shares are weaker this morning, with ShComp down 2.5% and Kospi -2.1%. A strategy note from Morgan Stanley is now advising an underweight position in global equities. Interestingly, a JPM piece is also warning against a bond shock given high durations and extremely low yields. Sounds like these guys are expecting an earthquake of some sort…
It was in April of 2015 with the German bund yield around the then unheard of low of around 19 bps when Bill Gross called bunds the short of a lifetime. The yield immediately shot up to nearly 1%. And here we now sit, at -37 bps. In the US, the treasury auctions 2’s, 10’s and 30’s this week as Powell speaks.https://www.zerohedge.com/news/2019-07-07/was-friday-start-monstrous-var-shock
–Speaking of shocks, Erdogan fired the head of Turkey’s central bank, sending the lira lower, while Trump keeps the pressure on Powell going into this week’s semi-annual testimony. Congressional testimony starts on Wednesday, although Powell also speaks tomorrow (Tuesday) on stress testing. It was reported a couple of weeks ago by Reuters that Brainard has almost single-handedly stopped the Fed from loosening some of the regulations put in place post-crisis. I’m no expert on regs, but it certainly does seem as if the US financial system is in much better shape and more solidly capitalized than european counterparts (as Deutsche sheds 20% of its workforce).
Job Insurance
July 7, 2019 – Weekly Comment
“President Trump was unhappy about the interest rate and he expressed his discontent at every chance. The bank’s decision to keep rates constant added to the problem with Powell,” a senior gov’t official told Reuters.
That’s a direct quote from a Reuters piece on July 5. Except for the fact that I changed the names. It’s not President Trump, but President Erdogan. And it’s not Powell, it’s Cetinkaya. The title of the article is ‘Turkey fires central bank chief as policy differences deepen amid economic malaise’. Murat Cetinkaya was, of course, the CB head, who reminded Erdogan of the bank’s independence and declined the invitation to resign just prior to being sacked. The same story played out in India last year, as CB head Urjit Patel resigned at the end of 2018 under government pressure. Easy money and a subservient CB solves everything, right?
It was a year ago that the Turkish Lira collapsed from 4.5 to 7.0 to the dollar, from the beginning of July to the beginning of August. Cetinkaya hiked a total of 750 bps and has kept the rate at 24% since September. TRY is now 5.6. Maybe Erdogan has a point. Trump on the other hand…
Like the markets, I have become comfortably numb to random tweets. I have to admit though, that Trump’s doozy about matching the currency manipulation game of Europe and China left me slack-jawed. Markets didn’t react at all. The president is calling for the devaluation of the currency and rate cuts. This week Powell will provide more information on the rate side of the equation while Mnuchin, ostensibly in charge of USD policy, squirms on the sidelines.
The jobs report was stronger than expected with NFP of 224k though annual wage gains of 3.1% were a shade softer than expected. As a result, thoughts of a 50 bp cut in July were dashed. August Fed Funds settled 9786.5, down 6.5 bps and 25.5 bps above July, which settled 9761.0. So the market is now priced for one cut at the end of the month FOMC. The Fed Effective rate has been from 2.37 to 2.40%. Trading a few bps on either side of 25 makes sense. The curve flattened as the red euro$ pack fell 12.75 bps, while greens fell 9.875 and blues 8.25. 2/10 treasury spread posted a new recent low of 17.1, falling 1.8 on the day and 8.8 on the week. It’s the curve, which is signaling a ‘tight’ central bank, that provides cover for a rate cut.
Also on Friday, the Fed released the semi-annual report to Congress, in front of Powell’s testimony on Wednesday and Thursday. From the way the short end was trading early in the morning, I think some details of the report likely leaked before its official 11:00 am release. Shall we characterize the upcoming ease as an “insurance cut” or the start of a prolonged campaign? The document provides some clues. The shortfall in inflation was once again viewed as transitory. The report refers to the Dallas Fed’s trimmed mean PCE inflation data. From that chart, pictured below from the St Louis Fed, one would conclude that there is NO problem at all with the inflation target. It has moved sideways since 2015 with a small upward bias. From the text, “The trimmed mean PCE price index, produced by the FRB of Dallas, provides an alternative way to purge inflation of transitory influences, and it is less sensitive than the core index to idiosyncratic price movements such as those noted earlier.”
The case for easing is even less compelling with respect to labor markets. The last twelve-month NFP average ending with Friday’s data is 192k. Over the year ending in June 2018, it was 206k. The previous year was 195k and the year ending in 2016 was 206k. There’s just not much in the way of variation. The Atanta Fed’s Wage Tracker has generally firmed since 2010, and has bounced between +2.9 and +3.9% since 2015, and is last at 3.7%.
Here’s where the semi-annual report implicitly makes the case for insurance cuts: “The [Q2} slowing that occurred in consumer spending appears to have been temporary, but the slowing in business fixed investment appears to be more persistent.” Further, “…forward-looking indicators of business spending such as capital spending plans have deteriorated amid downbeat business sentiment and profit expectations from industry analysts, reportedly reflecting trade tensions and concerns about global growth.” Morgan Stanley’s index of planned capex fell to the lowest level in two years, and S&P cut its forecast for capex growth to 3% in 2019 from 11% in 2018.
In essence, the Fed is likely to lean towards the idea of a couple of insurance cuts, called for by Trump, but circularly made necessary by his trade policies that have undermined business confidence and spending plans. China’s insistence that existing tariffs will have to be removed if there is to be a deal (July 4) indicate a long slog ahead on trade.
This week’s news will be dominated by Chairman Powell’s Congressional testimony on Wednesday and Thursday, but he also speaks at 8:45 on Tuesday morning regarding Stress testing. FOMC minutes out on Wednesday afternoon. Inflation data at the end of the week, with CPI Thursday, expected yoy Core 2.0% and PPI Friday with yoy Core 2.1%.
OTHER MARKET/TRADE THOUGHTS
Mester last week made the case for no ease. Kaplan is also concerned that easing may accentuate imbalances. However, Bullard and Kashkari are inclined to ease immediately. Powell will likely walk the center line and again refer to “an ounce of prevention.” Nothing in ISM pricing data suggests an upside surprise in CPI or PPI data. The adjustments made in prices of rate futures after the employment data are therefore probably a short term anchor. The dollar index surged Friday and is now in the upper half of the year’s range. A rally to new highs would signal stress for EM, but for now, it’s not much of a concern. On the other hand. Lagarde as ECB head probably portends a move in EUR to 1.05 to 1.10.
The treasury auctions 3’s, 10’s and 30’s starting Tuesday. USU made a new high on Friday and then posted a large outside range. While 5/30 fell this week along with almost all other curve measures, it still is in an uptrend. 5/30 declined 3 bps Friday to 70.7, and was down 6.5 on the week. Worth looking to sell rallies in USU against new highs.
In spite of Friday’s move there are still buyers of the idea that rates will approach zero next year. On Friday an additional 70k 0EM 9925/9975 c 1×2 bought. Settled 3.25 vs 9834.0 in EDM21. This trade has also been sizably accumulated in 0EH, settled 2.0 vs 9835.0. Open interest in March is 308k and 380k, and in June 146k and 248k.
| 6/28/2019 | 7/5/2019 | chg | |
| UST 2Y | 173.9 | 187.1 | 13.2 |
| UST 5Y | 175.5 | 183.9 | 8.4 |
| UST 10Y | 199.8 | 204.2 | 4.4 |
| UST 30Y | 252.7 | 254.6 | 1.9 |
| GERM 2Y | -75.0 | -74.9 | 0.1 |
| GERM 10Y | -32.7 | -36.3 | -3.6 |
| JPN 30Y | 35.4 | 33.4 | -2.0 |
| EURO$ Z9/Z0 | -35.5 | -36.5 | -1.0 |
| EURO$ Z0/Z1 | 6.0 | -0.5 | -6.5 |
| EUR | 113.72 | 112.26 | -1.46 |
| CRUDE (1st cont) | 58.47 | 57.51 | -0.96 |
| SPX | 2941.76 | 2990.41 | 48.65 |
| VIX | 15.08 | 13.28 | -1.80 |
Pence called back to help Trump choose more dovish Fed nominees than Lagarde
July 3, 2019
–Yields continue to drop with tens down 5.7 bps to 1.976 Tuesday, and lower yet this morning. Gold has soared by another $20 this morning to 1427. Stocks are salivating at the prospect of lower global rates, with Lagarde tapped to head the ECB and Trump nominating doves to join the Fed (Waller and Shelton). The best line I heard about Lagarde was that she was promoted from bailing out emerging economies at the IMF, to developed economies at the ECB.
–China Caixin Composite PMI was 50.6 and the Eurozone PMI was 52.1, a bit better than May’s 51.8.
–EDZ9 9800/9837 call 1×2 was exited 50k with a sale at 7.5 bps, and the roll to higher strikes continues, with buys of EDZ9 9850/9862 call spread just under 1.5 bps (settled 1.5 vs 9805.5).
–While a long holiday weekend is normally the occasion to preemptively take out a few days of time premium, there is perhaps a bit of risk this time, with the employment data on Friday. Also, the usual terrorist threats have been issued for the 4th of July holiday, underlined by VP Pence cancelling an appearance in New Hampshire (Live Free or Die) to remain in Washington, and Putin meeting with his defense minister as a Russian nuclear sub caught fire during a “research” mission.
–News today includes ADP expected +140k. Job Claims, Trade Balance, Service ISM. expected 55.9 from 56.9 and Factory Orders.
Back to 2016
July 2 2019
–Curve flattened slightly as the stock rally to new highs marginally tempered enthusiasm for aggressive rate cuts. Implied vol in dollars smoked. with most straddles down 2-3 bps. As an example, there was a new 10k block sale of 0EH atm 9837.5 straddle at 50.0 (down 3 on the day; settled 50.5). Mfg ISM was slightly better than expected at 51.7 but prices and new orders continue to sink. More and more data points are re-visiting levels from 2016, when routs in oil and emerging markets had sent yields to new lows. Strength seen in 2018 as a result of the tax package stimulus has now faded. Also worth noting that S Korea exports, known as the canary in the coalmine, fell 13.5% yoy. And that the bund has a yield of -36 bps as the ECB readies new support for the economy.
–Hong Kong protests have gone into high gear. Too early to tell how it plays out, but it’s another issue in the US/China relationship.
Back on (the same) track
July 1, 2019
–This weekend CNBC cited a report from JP Morgan saying that 80% of the stock market is on autopilot, as 60% is controlled by passive investing and 20% by quantitative strategies. Perhaps, but today’s surge to new highs on the US/China ‘trade truce’ is anything but passive. Safe havens are being swept aside. However, Fed Fund contracts and near eurodollars are down only 2 to 2.5 bps, indicating little change in ease odds in spite of trade talks being back on track.
–Aug crude oil is also at a new high above $60 as OPEC agreed to extend production cuts. It’s economic vibrancy around the globe. Except that China’s official and Caixin Mfg PMI reports both came in at 49.4. Of course, with trade tensions as good as settled, those reports are now in the rearview mirror. Today US ISM is expected 51.0 from 52.1 and the price index 53.0 from 53.2 last.
–Clarida spoke this morning in Helsinki, essentially giving the same speech as he has in the past on the Fed’s communication strategy review. ‘Maybe they won’t notice, because I am in Helsinki.’ I guess the new communication guidelines include repetition. From the speech, “With the US economy operating at or close to maximum employment and price stability, now is an especially opportune time to conduct this review. The unemployment rate is near a 50-year low and inflation is running close to our 2 percent objective.” But r-star is low. So now is a good time to loosen policy…
