CPI might be lower, but inflation expectations edging up
October 10, 2024
******************
–CPI today expected 0.1 with Core 0.2. On yoy basis, 2.3 expected from 2.5 last with Core 3.2, same as last.
I would note that the ten-yr breakeven (treasury – tip) rose to 229.5. Exactly one month ago on 10-Sept it hit the cycle low at 202.8. Those that believe the Fed made an error with the 50 bp cut can point to evidence of increased inflation expectations.
FOMC minutes, only 1 dissenter, but some favored only 25:
“A few participants also added that a 25 basis point move could signal a more predictable path of policy normalization. A few participants remarked that the overall path of policy normalization, rather than the specific amount of initial easing at this meeting, would be more important in determining the degree of policy restriction.”
–Yields rose yesterday with fives the weakest, +4 bps to 3.904%. 2s, 10s and 30s all have a 4 handle; 30s were up 1.4 bps at futures settle at 4.065% in front of today’s auction. However, USZ continued to press lower after the settle of 120-25, printing as low as 120-14 early this morning, and now at 120-19. Implied vol was firmer across the board on demand for TY puts. For example, new buyer of about 30k each TYZ4 106p for 3 and 105p for 2 (settled 4 and 3).
–Vol bid isn’t surprising on weaker prices and uncertainty related to inflation and Milton. October SOFR midcurves expire Friday. 0QV4 9656.25^ settled 15.25 ref 9655 in SFRZ5. Hefty premium for a 2 day straddle. TYX4 atm 112.25^ settled 1’07 yesterday with 16 days left. That’s 16.5 to 17 bps.
Calm before the storm
October 9, 2024
*****************
–Little change in rates Tuesday as selling pressure related to NFP abated. SFRH5 settled 9609, +3.0, the strongest contract on the strip. Every contract on the SOFR strip from SFRZ5 to SFRZ7 is between 9660 and 9666. In fact, Z5 is 9660 and Z7 is 9661, a spread of just -1. On June 26 this spread was -35.5 (9599/9634.5). Three months later on Sept 25 the spread hit a high of +24.5 as prices flipped (9710/9685.5) due to perceptions of front-loaded easing. Now what? Which to buy and which to sell? Ginger, or Mary Ann? One thing you can’t go wrong with: Dec Wheat. Popping over $6 this morning, looks ready to run.
–FOMC minutes today, following the 10y auction. At the futures close, 10y WI was 4.033. On July 1 the yield was 4.463%. On 9/16, just two days before the FOMC it was 3.62%.
–CLX4 erased Monday’s rally, down 3.26 bbl yesterday at 73.88. Many markets are spiking and fading.
–Boeing at risk of being cut to junk by both Moody’s and S&P. Google at risk of being broken up by the Federal Gov’t (according to FT). Florida facing a dire storm. Against this backdrop, a pillar of American consumerism, the french fry, is also under assault:
Lamb Weston, the largest producer of french fries in North America and a major supplier to fast-food chains, restaurants and grocery stores, is closing a production plant in Washington state. The company announced last week that it would lay off nearly 400 employees, or 4% of its workforce, and temporarily cut production lines in response to slowing customer demand.
https://www.cnn.com/2024/10/08/business/mcdonalds-french-fries-lamb-weston/index.html
–They can tell you the economy is great, that confidence is up, and that jobs are plentiful. “You want fries with that?”
–A post on X: “Elon Musk says he would like to fire about 80% of the federal government while working with Donald Trump.”
There’s a widespread belief that a Trump admin would blow out (the already shattered) budget, just like Harris. Gov’t spending has had the major supporting role, or, make it the lead role, in creating economic activity. Maybe those assumptions need to be examined more closely.
NFIB uncertainty index at new high
October 8, 2024
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–Follow-thru front end selling and continued flattening. On the SOFR strip, reds -8.5, greens -5.375, blues -3.625 and golds -3.125. On Oct 1, SFRZ5 settled 9705, yesterday it was -9 at 9557.5, down nearly 50 in four sessions. For comparison, over the same time period, SFRZ7 fell just 30, from 9691.5 to 9662. October midcurves expire Friday, and 0QV4 9662.5 straddle settled 16.5. Seems high. For good reason.
–New recent low in 5/30 at 43.8 bps; it had posted a high of 62 on Sept 25. TYZ4 settled 112-15+, down 11+ while cash tens were up 4.3 bps to 4.024% in front of tomorrow’s auction. Three year today, 30s on Thursday. There was not much evidence of a reach for puts in the long end. ATM TY straddle settled 2’17 (112.5^) from 2’20 Friday (113^). Some profit-taking sales noted in SFRZ4 puts, for example SFRZ4 9550p sold at 4.0 and settled there, 19 bps otm (9569s). The 9593.75 call settled 4.5.
–From Governor Kugler’s speech yesterday:
…my approach to any policy decision will continue to be data dependent and to rely on multiple and diverse sources of data to form my view of how the economy is evolving. For instance, I am closely monitoring the economic effects from Hurricane Helene and from geopolitical events in the Middle East, since these could affect the U.S. economic outlook. If downside risks to employment escalate, it may be appropriate to move policy more quickly to a neutral stance. Alternatively, if incoming data do not provide confidence that inflation is moving sustainably toward 2 percent, it may be appropriate to slow normalization in the policy rate.
–CLX4 was up nearly $3 bbl late at 77.34. Not only are the effects from Helene important to monitor, Milton is now bearing down on Florida. On another note, the Hang Seng index was down ~10% today. China’s stimulus packages had sparked a rally from 17k to 23k, but HSI fell to 21k today. Global volatility.
–Consumer Credit up just $8.9b with Revolving -1.2% annualized. Data from August, but seems surprising given the “roaring” job market.
Today’s news includes NFIB Small Business Optimism….just released; here’s a snippet:
The NFIB Small Business Optimism Index rose by 0.3 points in September to 91.5. This is the 33rd consecutive month below the 50-year average of 98. The Uncertainty Index rose 11 points to 103, the highest reading recorded.
–Trade balance and 3-year auction coming up.
Eases dialed down to quarter point increments
October 7, 2024
******************
–On September 24, FFG5 settled 9631 or 3.69%, 114 bps below the current Fed Effective rate of 4.83%. This contract captures the next three FOMC meetings. On the attached chart, I’ve marked eases in terms of 25 bp increments. Obviously, with the contract having settled -20 on Friday at 9592.5, one ease came out. This morning there is follow-through from Friday’s sell-off, with the contract down another 5 at 9587.5. If the Fed were to ease 25 bps at the Nov, Dec and Jan meetings, the final settle would be 9592.0 (right at Friday’s level). November FF settled 9537.0, and would settle 9536.17 on a cut of 25. So, even though the first cut was 50, Friday’s NFP of 254k has dialed down future cuts to quarter point increments.
–As mentioned over the weekend, there were huge declines in SOFR open interest, with SFRZ4 shedding 184k contracts or 14% of open contracts. Recalibration continues this morning with SFRZ4 down another 5.5 to 9571 (was -15.5 on Friday). SFRM5, which was the weakest contract on Friday, -28.5 at 9639.5, is down another 8 at 9631.5. Clearly some of the price action is simply forced liquidation.
–Curve flattened hard, with the 2yr yield up 21.6 to 3.928% and 10y up 13.3 to 3.981% 2/10 closed at 5.3 bps coming off a high of 23 on Sept 25. As previously mentioned, that area is essentially the halfway point between the 2021 high of 158 and the 2022 low of -109. Will likely hold between -10 and -5.
–Consumer Credit this afternoon. Several Fed speakers including Bowman and Kashkari. Auctions of 3s, 10s, 30s begin tomorrow. CPI Thursday.
Puke
October 6, 2024 – weekly comment
*****************
Friday’s payroll report showed a surge of 254k vs expected 150k, and the unemployment rate fell back to 4.1% from 4.2%. Rate futures plummeted. Curve flattened. Some are now saying that September’s 50 bp cut by the Fed was a policy error.
Below is a table of selected futures prices, along with bp changes and open interest changes. I only went as far as SFRH6 in SOFR because that was the peak contract for most of last week. In treasury futures, I marked the daily tick change along with cash treasury bp changes (even though durations are somewhat mismatched). Two main points. 1) There was an absolutely massive position puke in near SOFR contracts. Total open interest on the strip plunged by 432k contracts on Friday. 2) Net changes from mid-September highs (pre-FOMC) have been huge with near SOFR contracts rising in yield by half to 5/8% and cash treasuries by around 3/8%. The last FOMC was 18-Sept, nearly an exact top-tick as most futures prices peaked on 16-Sept.
November Fed Funds, which price the Nov-7 FOMC, settled 9537.0, -6.5 on the day. I calculate that a 25 bp ease at that meeting will result in a final settle of 9536.17. (A 50 bp cut would be 9555.33). As of Friday, the market is close to pricing a 25 bp cut, which one might say had been guided by Powell. The forward shift to a lower glide-path of rate cuts has been extraordinary this week.
As an aside, I’ve heard several commentators remark on huge, uncomfortable, shorts in crude oil, much having to do with COT reports. Just as a comparison, using the sum of the first two contracts in WTI, open interest fell by 6.8% on a price rise in CLX4 of 6.5% from 69.83 to 74.38 from 01-Oct to 04-Oct. However, using COZ4 and COF5 Brent contracts, open interest actually rose a bit from 01 to 03-Oct (04-Oct OI unavailable). Huge moves in oil, rates, and China’s stocks have likely caused large swings in hedge fund returns.
The late September surge in BCOM (Bbg Commodity Index) and in oil have some saying that inflation is likely to reaccelerate. BCOM closed 102.07; high of the year has been 107.24 and low (last month) was 93.33. Front WTI contract settled 74.38 vs this year’s high at 86.91. Last year’s high was 93.68 (in September, so a year later it’s down $19/bbl). In 2022 the high was over 120. We’re not even close to the year’s peak. While inflation may firm a bit from here, the shelter component is likely the most important piece of the forward outlook. CPI is released Thursday and is expected 0.1 with Core 0.2 month/month. YOY expected 2.3% from 2.5% last, with Core 3.2% from 3.2%. In March/April of 2023 when the regional banking ‘crisis’ flared, Powell refrained from easing even though SOFR futures briefly projected aggressive cuts. At the time, yoy CPI was declining, but was still 5.0 in March’23, 4.9 in April and 4.0 in May. If the yoy estimate of 2.3 is correct it will be the lowest since 2021. Pre-covid, the average CPI was 2.45% in 2018 and 1.8% in 2019. PPI is Friday. Also this week are auctions of 3s ($58b), 10s ($39b) and 30s ($22b). As the below chart shows, the low yield of 3.93% on 30s was set on 16-Sept, just two days prior to the FOMC. Since then, the yield has risen 33 bps and has broken a loosely drawn channel. Halfway back of this year’s range is 4.37, which is an appropriate short-term target. In futures terms, USZ4 settled 121-31 vs 4.267% on the long-bond. Ten bps in the contract is approx. 1-11 or a price of 120-20, which should be a solid support area (yield resistance).
Auction demand will be an interesting signal going forward. I believe the Fed wants to make sure that funding conditions are favorable for sustaining US debt, and that means a positive curve with a lower FF rate. In my view, geopolitical conditions coupled with uncertainty around (and just after) the election make an ease in November highly likely. With the market now pricing at 25 bps, I think plays for 50 are advantageously cheap.
Druckenmiller said last week, “Bipartisan fiscal recklessness is on the horizon.” My thought is that post-election, no matter who wins, markets may rebel. No one is talking about fiscal responsibility presently, but that may start to change. There was a quote on X from @SpecialSitsnews: “If you don’t rein in your mind, the market may have to.” -My first boss. Quote actually used “reign” so I guess this guy has a couple of things to work on.
There were a couple of BBG News bullet points that I found interesting last week:
– FRENCH PM BARNIER: REDUCTION OF DEFICIT PART OF POLICY PRIORITIES
– FRENCH PM BARNIER: PILE OF DEBT WILL WEIGH ON OUR CHILDREN IF WE DON’T ACT NOW
– FRENCH PM BARNIER: DEFICIT IS MAKING FRANCE WEAKER IN EUROPE (Tuesday Oct 1)
And on Thursday:
*ITALY PLANS WINDFALL LEVY ON COMPANIES TO NARROW DEFICIT
Perhaps the widening of France to Germany 10y spread this year is a nudge in the right direction. My thought is: when comments/critiques on a topic like excessive deficit spending begin at the periphery, it doesn’t take very long to affect the core. Markets may have to help rein in thoughtless spending. Bond yields will reign.
OTHER THOUGHTS/ TRADES
Last week I mentioned SFRZ4/M5/Z5 butterfly which settled -70 on Friday, 27-Sept. My inclination was to sell the back end of this fly, the M5/Z5 calendar. Obviously, it would have been better to be long the fly, as it exploded to -36 on Friday. SFRM5/Z5 still went from -17 to -27 on the week.
| 9/27/2024 | 10/4/2024 | chg | ||
| UST 2Y | 356.3 | 392.8 | 36.5 | |
| UST 5Y | 350.7 | 381.3 | 30.6 | |
| UST 10Y | 375.1 | 398.1 | 23.0 | |
| UST 30Y | 409.9 | 426.7 | 16.8 | |
| GERM 2Y | 207.6 | 220.3 | 12.7 | |
| GERM 10Y | 213.3 | 221.0 | 7.7 | |
| JPN 20Y | 166.7 | 165.6 | -1.1 | |
| CHINA 10Y | 218.3 | 221.0 | 2.7 | |
| SOFR Z4/Z5 | -104.0 | -90.0 | 14.0 | |
| SOFR Z5/Z6 | 8.0 | 4.0 | -4.0 | |
| SOFR Z6/Z7 | 12.0 | 4.5 | -7.5 | |
| EUR | 111.66 | 109.77 | -1.89 | |
| CRUDE (CLX4) | 68.18 | 74.38 | 6.20 | |
| SPX | 5738.17 | 5751.07 | 12.90 | 0.2% |
| VIX | 16.96 | 19.21 | 2.25 | |
Payrolls
October 4, 2024
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–Service ISM stronger than expected at 54.9 versus 51.5 last. Yields rose, with rate contracts closing at new lows, wiping out all gains made since the last employment report. For example, SFRH6, the peak SOFR contract, settled 9696, the first settlement below 9700 since 3-Sept. The high settle was 9723, a couple of days after the last NFP. Price action is bearish. Ten year yield rose 5.5 bps to 3.948%. The question becomes: Is a possible trend change due to Powell cooling off easing expectations? Is it due to renewed strength in the economy? Or is it a more insidious and pervasive recognition that reckless spending policies could rekindle inflation and resurrect bond vigilantes. Druckenmiller has taken the reins, saying he’s short bonds, but doesn’t know the timing. “Bipartisan fiscal recklessness is on the horizon.” [It’s not only on the horizon, it’s been a feature for years]. He said his ex-boss [Soros] “would be embarrassed” of him failing to make a bigger short bet on U.S. bonds, as he suggested inflation could now surge to levels last seen in the 1970s. (marketwatch.com)
–I mentioned the ten-year breakeven (10y minus tip yield) yesterday, and it edged to another slight new high at 221 bps. Not dramatic, but persistent. Treasury vol was flat to a bit softer, so there’s no real sense of panic despite closing on the lows, but we do have NFP today and 10, 30 year auctions next week. My guess is that a weak NFP will lead to a rally in TY which will be met with patient sellers, who might become more aggressive if yesterday’s lows are taken out. The Fed’s job is about to become much more difficult: rising long-end yields in the context of a slowing economy.
–I always associated 1970s inflation with oil shocks. CLX4 was up 3.61 to 73.71 and is well over 74 this morning. Not quite a “shock” but just as rate futures completely erased the September rally, WTI has erased September weakness. Longshoremen strike has ended; perhaps the union boss didn’t appreciate the limelight of seeing his sprawling mansion on every news show. 62% pay raise over 6 years.
–Payrolls today expected 140 to 150 from 142 last. Rate expected 4.2%.
It’s a league game Smokey
October 3, 2024
*****************
–Given all the other things going on in the world, I hadn’t thought much weight would be placed on tomorrow’s payroll data. The Boeing strike and longshoreman strike and effects of Helene will probably make this data volatile over the next few months. However, they were happy to use stronger than expected ADP (143k) as an excuse to sell rate futures. Red SOFR contracts settled -4.0 and the ten year yield rose the same amount, to close at 3.783%. 30y was up 5 bps to 4.13%. The ten year breakeven (treasury yield – tip) edged to a new recent high of 222 bps, coming off a low of 203 in early September. It seems to me that the long end has an undercurrent of weakness related to inflation concerns, supply in the context of unsustainable spending, and a possible lack of foreign sponsorship. Days of QT are numbered.
–Slight new high in SFRZ4/H5 at -51.5 (9596.5/9648) up 1 on the day. The next 3-m spread is H5/M5 at -30.5, and then M5/U5 at -15.5. Fair amount of fluidity represented by these spreads, dependent in large measure by the pace of easing. FFV4/FFG5, Oct/Feb which covers the next three FOMCs, is hanging around -100, yesterday at -100.5 (9518/9618.5). If inflation expectations flare up (evidenced by the 10y breakeven continuing to move up), it’s possible that pricing of near-term easing will reset to a slower pace.
–Several articles about depositor balances at BofA being marked at ZERO. (“Mark it zero dude”). Bloomberg headline today: Warren Buffet sells $338 million of BofA stock as spree slows.
Coincidence?
–And a nod to fellow conspiracists worried about a global monetary order controlling and reviewing all flows, here are the one-year futures calendars:
SFRZ4/Z5 is -1.045 (9595.5/9701)
ERZ4/Z5 is -1.025 (9718.5/9821)
SFIZ4/Z5 is -1.020 (9550.0/9652)
All the same price. Why OF COURSE I own gold. And tin, for my foil hat, which is why tin is near ytd highs.
–Today:
Jobless Claims expected 222k.
S&P services PMI 55.4 and Composite 54.3
ISM Services 51.7 from 51.5
Payrolls on Friday, NFP expected 140-150k with a rate of 4.2%
Strikes and strikes
October 2, 2024
******************
–Background: Israel weathers strikes by Iran. Massive damage from Helene. Longshoremen strike; they’re against automation. Right. Let’s bring back all futures pits…my trading jacket is still hanging in the closet, ready for action.
–At one point ESZ4 was down 80 before coming back to settle -54.5 at 5759.75, down around 1%. In some ways that’s a strong showing. CLX4 settled 69.83, up 1.66, but it’s currently 71.70 and about to explode like a China stock.
–Ordinarily I would have expected a steepener and mad grab for the front end, but the official press narrative following Powell’s speech on Monday is that November will be dialed down to 1/4 ease. So, the “flight” was evident in longer maturities. Twos fell just 3 bps to 3.617%, while tens dropped 5.7 bps to 3.741%. SFRZ4 barely budged, up only 1.5 to 9597.5, while Z5 rose 5.0 to 9705 and Z6 +6.5 to 9702.5. Every contract over the 2 years from U25 to U27 is between 9694.5 and 9708…all clustered around 3%. Economic data shows weakness but has refused to completely roll over, and Powell has deftly guided towards a terminal rate that won’t be revisiting anywhere near the zero-bound. Events are likely to overwhelm both conditions (in my opinion).
–In terms of the Nov 7 FOMC, FFX4 had decent trade and settled +0.5 at 9544.5. The month has 30 days. The first seven days of the contract will price at the current EFFR of 4.83 and the other 23 days will either be 4.58 or 4.33 (assuming there’s not an emergency ease, and to me, that’s not zero odds). FFX4 should go out at either 95.3617 or 95.55334. The difference is 19.164 bps and the midpoint is 9545.752. So there’s a lean towards 25, just like there was in October. Now let’s place it in context. JPM has called for 50 and the world is under stress that (domestically) is likely to increase with the election. Do the math. I guess it’s not going to register until there’s an official proclamation from Timiraos, but I’d like to get ahead of that particular X post. I am not a buyer of the long end, but would personally want to own Dec FV calls and call spreads on SFRZ4. NOT RECOMMENDATIONS.
–It’s hard to ignore the inflationary implications of higher oil and supply chain bottlenecks from the strike. Big headwind for the long end, and probably for stocks. In fact, ten-year breakeven edged to a modest new high of 219 bps. But if bad things are happening, the Fed cuts. A lot.
–ADP expected 125k from 99k. Employment Friday.
Recalibration
October 1, 2024
*****************
–Powell’s speech was succinct. Here’s all you need:
That decision [50 bps] reflects our growing confidence that, with an appropriate recalibration of our policy stance, strength in the labor market can be maintained in an environment of moderate economic growth and inflation moving sustainably down to our objective.
Looking forward, if the economy evolves broadly as expected, policy will move over time toward a more neutral stance. But we are not on any preset course. The risks are two-sided, and we will continue to make our decisions meeting by meeting.
–The market took it as a signal of slower easing. FT this morning: “Powell signals Fed will revert to quarter-point cut in November”. BBG: “BlackRock’s Fink says market is wrong on Fed rate-cut bets.”
–Front end has been pricing substantial cuts, as everyone knows. Yesterday, a bit of air came out. SFRM5 was the weakest contract, falling 13 bps to 9679. The high in that contract was 9700.5 on 16-Sept, so it’s gone from 3% to 3.21% in the last half of September. The current FF target is 4.75 to 5.00, so M5 is still pricing about 150 bps of ease by summer. The PEAK contract on the SOFR strip is now SFRH6 at 9702.5. OK, so let’s say 3% is the terminal rate, might even be neutral. Maybe things are priced about right, not wrong, like Larry says. “I’m smart and I want respect.”
–Anyway, there doesn’t seem to be a lot of edge from here. Escalation risks are obvious in the mideast and Russia, supply lines could be impacted due to the longshoremen strike and devastation in the southeast, the election looms, and of course the Diddy tapes are floating around. Flight-to-quality vs inflation risks and the need for gov’t re-building, all against a backdrop of an unsustainable debt build-up. From the Eagles: “Somebody’s gonna hurt someone. Before the night is through.”
–Today’s news includes S&P Mfg PMI expected 47.0
ISM Mfg 47.5 from 47.2
JOLTs unch’d from last at 7673k
Bowman and Powell today
September 30, 2024
**********************
–Bowman, the lone dissenter at the FOMC, who preferred a cut of only 25, speaks this morning at 8:50 EST. Powell later this afternoon at 1;55, both speaking on economic conditions. This morning also features Chicago PMI, expected 46.0 vs 46.1 last, and Dallas Fed Mfg expected -10.3 from -9.7. Quarterly Grain report at noon.
–JPM collar trade in SPX to reset today (JHEQX). According to ZH the current short call is the 5750 strike (my guess is that front-running has already occurred).
https://www.zerohedge.com/markets/what-will-happen-tomorrow-jpm-collar-trade
–But for pure stock market entertainment, look to China, where the CSI 300 continues to scream higher, now up 25% from 20-Sept! Should have listened to David Tepper when he said he was “buying everything” related to China’s stimulus packages.
–This is another potentially important piece of info, the first clip is from March, taken from tomsHardware.com. The facility is in Spruce Pine, North Carolina.
…Sibelco North America Inc. facility where ultra-high-purity quartz is mined. This location is vitally important as it is claimed to be “the sole supplier of the quartz required to make the crucibles needed to refine silicon wafers.”
The next clip is taken from linked article below, published today:
North Carolina’s Spruce Pine, devastated by Hurricane Helene, is the world’s main source of high-purity quartz needed for semiconductors, the production of which could be disrupted
–Yields eased Friday, led by the front end. SFRZ4 settled 9605, +4.5. SFRZ5, near the peak on the SOFR strip, settled 9709, +6.0, and Z6 settled 9701, +5.0. Two year note yield declined by 5.7 to 3.563% and tens eased 3.8 to 3.751%.
In: Eurodollar Options
