Stretched levels going into the year’s 2nd half
July 1, 2025
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-Dollar index new low this morning at 96.40, well below the level from which the Fed initially started its hiking campaign in 2022. $/yen has broken a support trendline in place since April’s low of 139.89 (which is essentially a double bottom from the Sept 2024 low of 139.58). Now 142.86. Gold has been in sdieways consolidation since May but is up 50 this morning with GCQ5 3358.
–US bonds making new highs. TYU5 currently 112-09+ vs yesterday settle 112-04. In the two weeks since June 16, 10y yield has fallen from 4.45% to this morning’s 4.196, essentially delivering one 25 bp ease since the June 18 FOMC (where the Fed passed on a cut). Over the same period, June 16 to present, 30y yield has fallen from 4.96 to this morning’s 4.74, and SFRZ6 has run 30 bps from 9668 to this morning’s 9698.5. ESU5 has galloped 1000 points since late April, from just over 5200 to this morning’s 6242. All levels which feel somewhat stretched going into the year’s second half, but of course, that doesn’t mean they can’t keep going given a backdrop of USD liquidity.
–This morning brings ISM Mfg expected 48.8 from 48.5 last and JOLTS expected 7300 from last at 7391. Lowest level of this cycle has been 7103 from last September; the high was 12134 on March 2022. In the 2 years prior to COVID, 2018 and 2019, JOLTs averaged around 7200.
New highs (maybe April WAS liberating)
June 27, 2025
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–New lows in near SOFR calendars as the market further embraces forward easing prospects. SFRU5/SFRZ5 3m calendar made a new low of -32 (9600/9632). The December yield of 3.68% is 65 bps lower than the current Fed Effective of 4.33. New low settles in near one-year calendars. SFRU5/U6 -92.5, down 5.5 on the day (9600/9692.5) and Z5/Z6 -64.5, down 3 on the day (9632/9696.5). SFRZ6 remains the peak contract on the SOFR strip, now butting up against 3% (9696.5 or 3.035%).
–If SOFR contracts are close to accurately projecting forward yields, consider things a year from now: inflation anchored around 2% (ten year breakeven is 2.30%), short term funding rates around 2.75 to 3.0%, perhaps a 10y treasury yield sub-4%, and 30y mortgage sub 5.5%. About as good as it gets. Equities at new highs yesterday against this backdrop.
–Longer yields fell, but not as much. Tens down 4 bps to 4.251% and 30s down 2.6 bps to 4.815%. New recent high in 2/10 to 53.8 bps (however the high in April was just over 64). 5/30 has made a new high for the cycle, ending yesterday at 101.8, the highest since October 2021. In Feb 2021, with funding rates at zero, the spread hit a high of 163. In 2010, (GFC) the peak reached over 300 bps. The open question is whether there could be a revolt in long-end yields due to unwieldy government finances. For now, a relaxation in SLR makes it likely that US banks can step up to absorb supply. New multi-year low in DXY (current 97.23) is a cautionary signal.
–News today includes PCE prices, expected 0.1% both headline and Core, with yoy expected 2.3% from 2.1% last and Core 2.6% from 2.5% last. Final U of M Sentiment and inflation.
Run hot with Fed eases
June 26, 2025
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–Dollar index is at a new low this morning, with a print of 97.00. It’s now at a lower level than when the Fed first started its hiking campaign on March 16, 2022. At that time, DXY was 98.62 and the FF target was raised from 0 to 0.25-0.50%. By September the high was 114.78. The low at the start of 2021 was 89.21.
–Yesterday’s session in rates was somewhat quiet, with strength in the front end of the curve. Strongest SOFR contracts were SFRU5 and Z5, both +2 on the day to 9597.5 and 9627.0. Deferred contracts were unch’d to +1. Ten year yield was essentially unchanged at 4.29%. Powell was circumspect about the inflationary impact of tariffs in yesterday’s testimony. Tomorrow PCE prices are released, expected 0.1 both headline and Core, with yoy expected 2.3% from 2.1% last and Core 2.6% from 2.5%. Yesterday FFQ5 settled 9573.5 (+1.5). 50/50 odds of an ease at the July meeting would put FFQ5 at 9579.5.
–Things appear to be lining up for a ‘run hot’ economy. NQU5 is building on gains from the last couple of days and is close to making new all-time highs. Last print +92, 22553.
–News today includes Trade Balance, Final Q1 GDP, Jobless Claims expected 243k from 245k last. 7y auction.
There Will Be Easing
June 25, 2025
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–Buy America day as Israel/Iran ceasefire appears to be holding. SPX up 1.1%. Ten-year yield down 3.5 bps. Oil lower.
–Near SOFR calendars made new lows as Powell fielded questions and soliloquies from Congress. He said that rates were modestly, not moderately, restrictive. SOFR contracts from March’26 to March’30 were up 3 to 3.5 bps. The market continues to build easing into forward rates. SFRU5/SFRU6 one-yr calendar made a new low -88.5 (9595.5/9684.0) -3.0 on the day. SFRU5/SFRZ5 3-mo calendar also at a new recent low -29.5 (9595.5/9625.0). So that 3m calendar roughly signals more than one-ease, and the December price, which equates to 3.75%, is 50 bps lower than the bottom of current FF target (4.25 to 4.50%). I’ve noted previously that the Fed Effective rate of 4.33% seems to be an anchor for the 10y treasury, which closed 4.289% yesterday.
–In terms of an immediate ease, that is, one month from now on July 30, August FF showed no change in odds at around 20%, settling -0.5 at 9572.0. Current EFFR is 4.33 or 9567.
–Ed Bolingbroke of Bloomberg and Kevin Muir, Macro Tourist, yesterday highlighted the idea of forward spreads reflecting an easier Fed post-Powell (perhaps to modestly stimulative??). Below is a graph of SFRH6 (which covers the 3m period from mid-March to mid-June, just before Powell’s term ends), to SFRU6 which will give the new Chair the chance to get his feet wet with a couple of cuts. At the end of March, the spread was -8, (9649.5/9657.5). At yesterday’s settle it was -34.5 (9649.6/9684.0). That’s a change just about equal to one 25 bp move. An early buyer yesterday of 30k 0QU5 9725/9750cs for 3.5 reflects the same idea…forward easing of a magnitude greater than the market currently expects. Call spread settled 3.75 vs underlying SFRU6 9684.0. Lower strike is, of course, 2.75%.
Choreographed and Scripted
June 24, 2025
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–Choreographed is the word BBG uses in its description of Iran’s attack on bases in Qatar, which was immediately followed by Trump saying he would like to refrain from further military engagement, and later, the announcement of a cease fire. It’s rumored that Qatar suggested the attacks on its soil, making sure no personnel were injured. Following the face-saving salvo, Saudi Arabia condemned the attack in ‘the strongest terms’…”constitutes a flagrant violation of international law and the principles of good neighbors. It is unacceptable and cannot be justified under any circumstances.” Qatar, summoned the Iranian Ambassodor to condemn the action. “This cafe is closed until further notice…I’m shocked, shocked to find that gambling is going on in here.”
–In the 1991 Gulf War, the risk metric was the 3-month bill vs eurodollar spread, the TED. It was normally around 20 to 25 bps if memory serves. I believe it was around 60 as the US was rumored to enter the ground war. On the night the US entered Kuwait, the spread collapsed. Risk-off unwind. That’s what happened to oil yesterday. In the recent ‘liberation day’ episode, CLQ5 hit a high of 70.43 on April 2. On April 9 the low was 54.13, a range of just over $16. Yesterday’s high was 78.40 and this morning’s low is 64.38, a range of $14.
–On reports of Iran’s scripted attack, stocks powered higher, oil fell. US yields ended lower on the day. The 2y fell nearly 8 bps to 3.827%, and tens fell 5.1 to 4.324%. SFRM6 was the strongest on the SOFR strip, ending +10 at 9668.0. Peak contract is still SFRZ6 at 9685.5 (+9.5). SFRU5/U6 1-yr calendar posted a new low -85.5 (-4.0). Inflationary implications from higher energy prices evaporated. In that context: Bowman says open to July rate cut if inflation contained. So… Waller and Bowman are both eyeing July. August Fed Funds (FFQ5) settled +1.5 at 9572.5. 5.5 lower in yield than the current Fed Effective, around 22% odds of a July ease. Powell’s testimony in front of Congress starts today.
–Also today, the 2y auction, followed by 5s, 7s, Wednesday and Thursday. Consumer Confidence expected 99.8 from 98.0 last. The low spike in April was 85.7, which was right around Covid lows.
None Shall Pass
June 23, 2025
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King Arthur: Now, stand aside, worthy adversary.
Black Knight: Tis but a scratch
King Arthur: “A scratch?” Your arm’s off.
Black Knight: No it isn’t
King Arthur: Well, what’s that then?
Black Knight: I’ve ‘ad worse.
–Dramatic escalation in the mideast has oil slightly higher, ditto for stocks. Bonds a few ticks lower. CLQ5 hit a high of $78.40 Sunday night, up 4.56, but it has stair-stepped lower from there and is now around $74, from Friday’s settle of 73.84. Similarly, ESU was -59 at the low at 5959, but is now marginally higher on the day. Business as usual.
–It’s somewhat amazing that almost no market is showing a net change from Friday greater than 50 bps. Except platinum. That’s up over 2% to 1291, with gold down a few bucks.
–Today’s news includes S&P Mfg PMI expected 51 from 52. Composite expected slightly lower than last, at 52.1. Existing Home Sales 3.95m vs 4.00 last. The lowest number since 2011 has been 3.90m, last year in September. Mortgage rates are key.
I guess they took the TACO thing too far
June 22, 2025 – Weekly comment
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On Friday there was an early buyer of 40k TYQ 112c, 24/64s paid ref 110-205. Expires 25-July, delta 32, settled 28 vs 110-315. Total volume for this strike on Friday was 136k, with open interest increasing 82.8k to 172k, easily the peak open interest of any TY call. Next closest are 112.5 and 113c at 73k and 75k. With TYU5 having a DV01 of 66.30, the 112 strike is about 15 bps away, roughly 4.22% on cash tens.
It appears as if someone needed a hedge in case of a US bombing campaign in Iran, which of course came to pass this weekend and now overshadows Powell’s semi-annual testimony (Tues/Wed) and PCE prices (Friday).
As can be seen on the MOVE index, implied vol has been unwinding ever since Liberation Day, despite huge geopolitical uncertainties. August TY calls could easily be considered in the “buy” area. I would hazard a guess that treasuries will again function as a risk-off play, though a wider conflict will almost certainly exacerbate inflationary pressures. (How much does US weaponry depend on rare earth inputs from China?)
From DefenseOne.com on April 23, 2025.
Since 2010, the Pentagon’s demand for components containing five critical minerals—antimony, gallium, germanium, tungsten, and tellurium—has surged, with contracts growing by 23.2% annually and gallium-related contracts alone increasing 41.8% per year. More than 80,000 distinct parts across 1,900 weapons now depend on these materials, or about 78% of all DoD weapons may be affected, according to a new report by the Govini data analytics firm.
https://www.defenseone.com/threats/2025/04/chinas-rare-earth-mineral-squeeze-will-hit-pentagon-hard/404776/
Modest risk-off reaction in bitcoin over the weekend, with a low of $101k as of Sunday morning 7:00am EST. High on Monday June 16 was around 109k.
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Just a couple of non-war-related items from Friday:
Waller said Fed could ease as soon as July as the “Fed’s benchmark rate is 1.25 to 1.5% above the estimated neutral level…” (BBG). I also saw this bullet point
*WALLER: DON’T WANT TO WAIT FOR CUTS UNTIL JOB MARKET TANKS
Some saw Waller’s comments as a brazen ploy to jockey for the Fed Chair job. I think that’s indiscriminately harsh and fails to recognize consistent messaging from Waller all year.
https://www.federalreserve.gov/newsevents/speech/waller20250217a.htm
From February 2025: ‘Disinflation Progress Uneven but Still on Track; Rate Cuts on Track as Well’
So for now, I believe a pause in rate cuts is appropriate. Assuming the labor market continues to be in rough balance, I can wait and see if the higher inflation readings in January moderate, as they have in the past couple of years. If so, I’ll have to decide if this reflects residual seasonality that will go away later in the year and if the underlying trend in inflation is toward 2 percent, or if there is a different issue holding up inflation and how that may play out. Whichever case it may be, the data are not supporting a reduction in the policy rate at this time. But if 2025 plays out like 2024, rate cuts would be appropriate at some point this year.
https://www.federalreserve.gov/newsevents/speech/waller20250414a.htm
From April 14, 2025 (post-Liberation Day) ‘A Tale of Two Outlooks’
While I expect the inflationary effects of higher tariffs to be temporary, their effects on output and employment could be longer-lasting and an important factor in determining the appropriate stance of monetary policy. If the slowdown is significant and even threatens a recession, then I would expect to favor cutting the FOMC’s policy rate sooner, and to a greater extent than I had previously thought. In my February speech, I referred to this as the world of “bad news” rate cuts. With a rapidly slowing economy, even if inflation is running well above 2 percent, I expect the risk of recession would outweigh the risk of escalating inflation, especially if the effects of tariffs in raising inflation are expected to be short lived
In such a scenario, the outlook for monetary policy might not look much different than it did before March 1. With a fairly small tariff effect on inflation, I would expect inflation to continue on its path down towards our 2 percent target. In this case, “good news” rate cuts are very much on the table in the latter half of this year.
The Fed is data dependent (I am accepting that premise at face value and am ignoring political motivations) but comments from Powell and Waller indicate institutional uncertainty about which mandate is more important: inflation or labor. As friend James Fishback mentioned on Stuart Varney’s show, Powell mentioned the word ‘tariffs’ 31 times [during the press conference]. He mentioned the words ‘deregulation or regulation’ zero times…” Powell is more concerned about inflation, and given the weekend’s events, that’s clearly the dominant concern. Waller sees a deteriorating job market and thinks there’s room to proactively address that side of the equation.
Powell at the press conference:
“So, of course, this is something [tariffs] we sort of know is coming. We just don’t know the size of it. And again, the economy seems to be in solid shape. The labor market is not crying out for a rate cut.
I was going to write about the impact of AI this week. Over the medium term, the labor market will suffer. We’ll leave that for another time, though I did see this amusing comment:
“As a typical American, I’m not entirely sure whether AI is good or bad, but I now know that it stands for Applebee’s and IHOP.” The company behind Applebee’s and IHOP plans to use artificial intelligence in its restaurants and behind the scenes to streamline operations and encourage repeat customers. That’s the power of AI: an upsale to tater tots from regular fries.
In terms of whether the market is crying out for easing, I would have to agree with Powell’s assessment, though I lean toward Waller’s idea that the Fed’s too late by the time the actual ‘crying’ starts.
In terms of pricing, SFRU5/SFRU6 one-yr calendar settled at a new low for the cycle of -81.5 (9589.5/9671). The low settle in SFRM5/M6 was -111 on settlement basis, on 30-April. The next FOMC meeting is July 31, so I am also watching FFQ5/FFQ6 since August FF will be the first clean FF contract after the July FOMC. FFQ5/Q6 settled -96, (9571/9667). The current Fed Effective rate is 4.33% or 9567; one year forward FFQ6 is exactly 100 bps lower. So, for the past several months at least, the near one-year calendars have been tacking around -100 to -90 with a roll bias to the downside. My rule of thumb is that the one-year calendar prices somewhere around 50% of the probable move. If 100 bps is neutral and inflation is 2.25%, then a FF rate of 3.25% makes sense, and that’s essentially where SFRU6 and Z6 currently trade. If the environment devolves into a rapid risk-off asset price plunge it wouldn’t be surprising to see FF down to 2.25% a year from now.
A couple of other trades from Friday:
SFRZ5 9568.75/9550p 1×2 0.25 was paid 50k. Settled 2.0 and 0.75, the top strike now has 395k open and the 9662.5 strike has 627k open. This is a ‘Fed on hold or one hike’ trade. SFRM5 settled Friday 9567.5 so that’s 1.25 in the money on the 1×2 top strike (Assume no eases). SFRZ5 9562.5/9550p spread 1×1 settled 0.5. Could severe supply-chain disruptions and a jump in energy spark a hawkish response from Powell before his term ends? (May 2026)
2QX5 2QZ5 9650/9625/9600p fly stupid (bought both) 7.5 paid for 20k. 2QX5 settled 3.25 and 2QZ5 settled 3.50. SFRZ7 settled 9660, and the preceding contract, SFRU7 settled 9666, so at present the roll over time is higher, a slight headwind for this trade, but there are many scenarios where it could work out.
Last week I had flagged a trade: SFRM6 9800c vs 0QM6 9800c, buying M6. Both options expire on 12-June, 2026. On Friday, 6/13 the option spread settled 0.25 (8.75 and 8.5). Futures settled 9653.5 and 9663.0 (M6, M7).
My comment last week: “This trade is a synthetic steepener. Works best on aggressive easing which typically causes reds to outperform and steepen vs more deferred SOFR contracts. Obviously, the 2% strike is ambitious and zero premium outlay would be preferable, but I wouldn’t be surprised to see more of this type of trade go through.”
What’s worth considering is that Powell’s term ends just prior to June 2026. If Trump has his way, the new Fed chair will be EASY MONEY. (This very topic was discussed by Kevin Muir and Patrick Ceresna on Market Huddle). Outsized rate cuts would almost certainly be associated with forward steepening (think September 2024 initial 50 bp cut and the following reaction in one-year forward SFRZ5: On Sept 19, the day after the 9/18 cut, SFRZ5 settled 9708. Two months later, on 11/19, it was 9615.5). On Friday, SFRM6 settled 9658 and M6 9800c 8.5. SFRM7 settled 9671.5 and 0QM6 9800c 9.25. The trade is slightly underwater, and I am not certain it’s predicated on the timing of Powell’s exit. However, this line of thinking is likely to become a strong theme, and a risk-defined way to play it is long nearer calls or call spreads and short deferred.
THIS IS NOT A RECOMMENDATION.
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This week:
Monday: S&P Mfg PMI and Existing Home Sales
Tuesday: Philly non-mfg, Consumer Confidence (April matched Covid lows at 85.7 but May bounced to 98.0)
Auction: $69b 2yr
POWELL Semi-Annual Testimony Tuesday and Wednesday
(On Friday Waller said Fed could ease in July. Barkin said there’s no rush to cut).
Wednesday: New Home Sales
Auction: $70b 5yr
Thursday: Q1 GDP final. Durables. Jobless Claims expected 247k
Auction: $44b 7yr
Friday: PCE Prices expected 0.1 with Core 0.1. YOY expected 2.3% with Core 2.6%
| 6/13/2025 | 6/20/2025 | chg | ||
| UST 2Y | 395.6 | 390.6 | -5.0 | wi 387.8 |
| UST 5Y | 401.9 | 395.9 | -6.0 | wi 396.9 |
| UST 10Y | 442.0 | 437.5 | -4.5 | |
| UST 30Y | 491.1 | 488.9 | -2.2 | |
| GERM 2Y | 185.1 | 184.5 | -0.6 | |
| GERM 10Y | 253.3 | 251.6 | -1.7 | |
| JPN 20Y | 235.2 | 234.2 | -1.0 | |
| CHINA 10Y | 169.8 | 163.8 | -6.0 | |
| SOFR U5/U6 | -73.5 | -81.5 | -8.00 | |
| SOFR U6/U7 | 6.5 | 5.0 | -1.5 | |
| SOFR U7/U8 | 19.0 | 20.0 | 1.0 | |
| EUR | 115.52 | 115.25 | -0.27 | |
| CRUDE (CLQ5) | 71.29 | 73.84 | 2.55 | |
| SPX | 5976.97 | 5967.84 | -9.13 | -0.2% |
| VIX | 20.82 | 20.62 | -0.20 | |
| MOVE | 95.31 | 90.10 | -5.21 | |
Trump’s delay
June 20, 2025
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–USU5 traded as low as 113-04 early yesterday (-16) but recovered to 113-25 as stocks slid. ESU5 was down over 60 at the lows. This morning USU is back down at 113-07 and stocks have recovered on news that Trump is delaying a decision on bombing Iran for 2 weeks. Probably makes Israel’s campaign more urgent. Big option expiration in equities today.
–Below are a couple of charts indicating deterioration in luxury brands. LVMH down nearly 50% in a little over a year. Also attached is the luxury watch index, down 3.4% in the past year.
https://watchcharts.com/watches/price_index
No drama from FOMC
June 19, 2025
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–In assessing the importance and impact of yesterday’s FOMC, note that across the entire US interest rate spectrum, net changes at futures settlement were almost zero. SFRZ5 settled +2 at 9611 or 3.89%. That was the largest change, the outlier, JUST +2. The Fed’s SEP left the end-of-year FF projection at 3.9% (though 7 members/dots projected NO more cuts for this year, up from 4 in March). Aside from SFRZ5 ALL contracts were within 1 bp of previous settles, right out to the 30y bond. The SEP trimmed forward growth, raised unemployment, increased inflation and slowed the pace of rate cuts. From the press conference, the methodology appears to have been simply plugging in an increase in prices due to tariffs, and mechanically running it through ‘the model’ to spit out other data points.
–An example of yesterday’s FOMC trade: SFRZ5 9612.5^ sold at 42.5, 2k. Tuesday’s settle was 44.5, yesterday’s was 42.0.
–In reviewing the SEP, I would note by implication that the neutral rate seems to be around 1%. GDP for 2025 was revised lower to 1.4%, with Core PCE inflation 3.1% (up from 2.8%) and FF at 3.9%. So real FF rate 0.8%. For 2026, GDP estimated 1.6%, Core PCE 2.4% and FF 3.6% so real FF 1.2%. Over the ‘Longer run’ GDP estimated 1.8% with Unemp 4.2, PCE Prices 2.0 and FF 3.0. That’s the base model.
–Here we go again: SNB cuts rate to zero and hints at more to stop inflows into the franc. A BBG bullet point says ‘Profitability of banks not within SNB mandate’. UBS at 24.84 (CHF) down 0.38 this morning. (RTRS) “The loss potential for UBS, Switzerland’s sole remaining big bank, which acquired rival Credit Suisse in 2023, remained substantial under various stress scenarios, the SNB said.” Sweden’s Riksbank cut to 2% yesterday (expected) and signaled more to come. The high in 2024 was 4%.
Flatter for FOMC
June 18, 2025
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–Yields eased going into today’s FOMC as Israel/Iran conflict heightens risks and retail sales came in soft. Tens down 4 bps to 4.389%. Front end remains anchored in the mud at the current policy rate of 4.25-4.5% while awaiting clarity. Contracts that are pricing forward yields are floating to the surface. Red pack +4 bps to 9669.5 or 3.305%, about 100 lower than the Fed’s current policy stance. New lows in all near one-year calendars in SOFR. The lowest is SFRU5/SFRU6 at -81 (9585, -2.0 and 9666, +2.5). SFRZ5/Z6 is at a new low -63 (9609, -2.5 and 9672, +4.0). Dot plot from March indicated end-of-2025 at 3.9% and end-of-2026 at 3.4%, which would suggest -50 for Dec/Dec. The market is leaning toward larger forward easing prospects. Note that SFRZ6 is the peak contract on the SOFR strip at 3.28%, and that many option spreads have been initiated based on the idea that Z5/Z6 calendar would naturally roll lower over time.
–New low as well in 2/10 at 44.3 bps (3.946% and 4.389%). Tens can’t seem to get far from the current Fed Effective Rate of 4.33%.
–Quick note on oil (WTI). On 6/11, one week ago, prices were already starting to move higher. On 6/11 CLQ5 settled 66.90 and the Aug 67 straddle settled 6.12 (expiring July 17). Yesterday CLQ5 settled 73.27 and the CLQ5 73 straddle settled 11.33! This morning, even with futures now lower on the day at 72.40, -0.87, CLQ 73 puts have LOST value.
–Today’s news includes Jobless Claims, last at 248k, and Housing Starts. Tomorrow’s holiday session will not have official settlements. Screens open until noon Chicago time.
