In 2007 the first cut was 50 bps, on Sept 18…
September 16, 2024
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–On Sept 18, 2007 the Fed initiated the first cut, from 5.25 to 4.75. SPX rallied, gaining about 6% from the Sept 17 close, to the high settle on 10/9 of 1565. That remained the high until 2013. (High print was 10/11/07). So 16 or 17 trading sessions after the first ease was the high from which the GFC unfolded. Dates line up the same; I would note that Oct 4 is the employment report. FOMC announcement and press conf is Wednesday, September 18.
–Friday featured continued strength in the front end, with SFRZ4, H5, M5 and U5 closing at new highs. 9596.5, 9662.5, 9697.5 and 9712. SFRH5 was the leader, settling +9.0 on the day. The price of 9662.5 is 200 bps above where the recently expired SFRM4 ended, at 9463. SFRH6 was only +2 at 9720 (high point on the curve) and SFRH7 was +1 at 9712. Buyer of 50-60k SFRZ4 9550p for 2.25 to 2.5.
–Treasury curve steepened to new highs on strength in front. 2’s fell 7.4 bps to 3.574 and 10’s fell 3.2 to 3.646. 2/10 was as low as -50 on June 25, now +7.2 less than three months later. 5/30 also at a new high of +55.2.
–BOJ meeting is at end of week. While today is a holiday in Japan, this morning JPY is at a new low for the year sub-140 (139.91 as of this note). Low on 12/28/23 was 140.25.
–News today includes Empire Mfg, expected -4.0 from -4.7. While -4 would be close to the high for this calendar year, it hasn’t been above zero since late 2023.
–The end of the hiking cycle in 2018 probably isn’t much of a comparison for today as the peak rate was only 2.25 to 2.50%, but I suppose the takeaway would be a lower 10y yield. Image below. I am guessing that the high FF target of 2.25 to 2.5 at the end of 2018 should act as a floor for the easing to come.
In: Eurodollar Options
Strange
Sept 15, 2024 – Weekly Comment
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How many lives are living strange? – Oasis
The US ran a $318 billion deficit. In August. Yuge. Gold settled at a new all-time high this week with GCZ4 2610.70 and spot 2577.50. In early 1979 gold was around 200. By September it got to a little over 400. Chopped around a bit but then, from December 1979 to January 1980 it doubled again like a champagne supernova, from 400 to 850. We’re now about 10x higher…in 2023 gold chopped around 2000. It’s crazy to think of $8500. Right? Maybe not. Strange things can happen. Who would’ve ever thought the Gallagher brothers would reunite in concert?
In late August the NFL approved a plan to allow private equity to buy stakes in teams. Owners distributing equity (risk) at the top. The US is considering a Sovereign Wealth Fund (as private equity owners are having problems meeting cash flow ‘promises’ to investors). Is this the same idea? Distribute (the losers) to the US Government at the top?
Stats below are clipped from Credit Bubble Bulletin’s analysis of the Fed’s Z.1 Q2 data:
https://creditbubblebulletin.blogspot.com/
For the quarter, Household Net Worth (assets minus liabilities) surged $2.760 TN to a record $163.797 TN, with four-quarter growth of $10.812 TN. Household Net Worth has inflated $46.586 TN, or 40%, since the end of 2019 (18 quarters). Net Worth ended June at 572% of GDP, up from 2019’s 535%, and the previous cycle peaks 488% (Q1 2007) and 444% (Q1 2000).
Household Real Estate holdings inflated $1.752 TN during the quarter to a record $52.319 TN (one-year growth $3.007 TN). Real Estate ended June at 183% of GDP, up from the end of 2019’s 153% – and now only moderately below the mortgage finance Bubble peak 190% (Q3 2006).
Household Financial Asset holdings inflated another $1.134 TN to a record $123.238 TN, with one-year growth of $8.180 TN. Financial holdings ended 2019 at $93.937 TN. Financial Holdings ended the quarter at 430% of GDP, versus previous cycle peaks of 373% (Q3 2007) and 354% (Q1 2000).
Total Household Equities holdings-to-GDP ended June at 161%, versus previous cycle peaks 105% (Q2 2007) and 115% (Q1 2000).
These data suggest a broader picture of the ‘Buffet Indicator’, the Wilshire 5000 market cap to GDP. According to longtermtrends.net that value is now at a record 192%. I would posit that much of this ‘wealth’ was driven by massive US deficit spending which will likely decelerate, no matter who controls the apparatus of government next year. “Wealth” to GDP is at insane levels. From last week’s Thoughtful Money interview with Neil Howe: “What worries me is the amount of reconstruction we have to do around public priorities. We have a very large public sector today which is overwhelming oriented toward redistributing income to old people. Half of the federal budget excluding interest payments, ten years from now, according to the CBO, will be going to Americans age 65 and older. …In a crisis, you have to look at the numbers.”
There are increasing mentions of credit stress, including a surge in bankruptcies and delinquencies. For example, WSJ ran this headline over the weekend: ‘Americans Are Falling Behind on Bills, Alarming Wall Street’ – Lenders are seeing a rise in late payments on credit cards and auto loans. Ally Financial (ALLY) is down 23% so far in Sept as the CFO says its borrowers are struggling.
This data is from end of Q2 2024 from the American Bankruptcy Institute:
“Bankruptcy filings including all chapters totaled 40,276, a 7% increase from the June 2023 total of 37,790.”
In my experience, financial stress sparks selling of assets, but since the GFC, the model seems to be to transfer private debts to the federal government’s balance sheet. The Feds then deftly manipulate manage these pools, with examples ranging from the SPR to the composition of debt issuance at the Quarterly Refundings. In Europe as well, Draghi is calling for a new “industrial strategy.”
Even with a 4% surge in SPX this week, net changes in rates were somewhat subdued in front of the FOMC. Largest mover was 2y from 3.65% to 3.574%. Several ‘news plants’ suggested the Fed should ease 50 rather than 25 bps (immediately after Wednesday’s CPI data shifted market sentiment to 25). The most influential piece was by Nick Timiraos of the WSJ: ‘The Fed’s Rate-Cut Dilemma: Start Big or Small?’ On Friday FFV4 settled 9504.5, the exact dividing line between 25 and 50. It had traded as low as 9495 after CPI. SFRU4 settled 9514.5. Both of these contracts are likely to be 11-12 bps different at Wednesday’s settle. What is less clear is how forward contracts will react.
On the SOFR strip, Z4, H5, M5 and U5 closed the week at new highs, 9596.5, 9662.5, 9697.5, 9712. The 2yr note is at a new low yield of 3.57%, a level last seen exactly two years ago in September 2022 as the hiking campaign was in full swing. (Ultimate high was 5.22%). Let’s consider SFRZ4 just over 4% and SFRM5 at just over 3%. If the Fed only eases 25 to a midpoint target of 5.125%, can Dec’24 hold near 4%? That would take certainty of 50 bp cuts in Nov and Dec. Another 100 by June? Not out of the question, but a lot will depend on guidance at the press conference. My assumption is a cut of 50 on Wednesday, as a risk management maneuver to support both the labor market and the Harris campaign. (I’ll take the Guiness bet payoff on Thursday, YZ and RD). I think the Chair will stress data-dependency going forward, which isn’t much of a stretch considering post-election uncertainties.
The chart below is something I just find interesting. The last hike of this cycle was July 26, 2023 to a midpoint FF of 5.375% At the time, the 30-yr bond yield was 3.97%. Since that time, the 30-yr yield has had a floor right around that 4% yield. On Friday, going into the first ease, the 30-yr yield is exactly where it was at the last hike. 3.975%. For the sake of comparison, changes on other treasuries from July 26, 2023 to Friday are:
2yr 4.85% to 3.57% (-128 bps)
5yr 4.12% to 3.42% (- 70 bps)
10y 3.87% to 3.65% (- 22 bps)
Clearly the 2-yr note reflects the same expectations of ‘front-loaded’ eases as are embedded in the SOFR curve. As another point of comparison, in 2006 the last hike was June 29 to 5.25%. At that time, the 30-yr yield was exactly the same, at 5.25%, near the high of the move. The first ease was Sept 17, 2007. At that time the yield was 4.75% (though it had exploded up to 5.40% in June 2017).
My thought is that the Fed could easily take back the last 175 to 200 bps of ease by Q1. SFRH5 is essentially priced that way: SFRM4 just went off the board at 9463.0 and SFRH5 is 200 higher at 9662.5. The natural play is to fade that certainty. Indeed there was a buyer of some 60k SFRZ4 9550p on Friday for 2.25 to 2.5.
| 9/6/2024 | 9/13/2024 | chg | ||
| UST 2Y | 365.2 | 357.4 | -7.8 | |
| UST 5Y | 349.0 | 342.3 | -6.7 | |
| UST 10Y | 370.8 | 364.6 | -6.2 | |
| UST 30Y | 401.8 | 397.5 | -4.3 | |
| GERM 2Y | 223.0 | 221.1 | -1.9 | |
| GERM 10Y | 217.2 | 214.8 | -2.4 | |
| JPN 20Y | 165.8 | 163.5 | -2.3 | |
| CHINA 10Y | 213.8 | 207.3 | -6.5 | |
| SOFR Z4/Z5 | -122.0 | -121.5 | 0.5 | |
| SOFR Z5/Z6 | 4.5 | 3.5 | -1.0 | |
| SOFR Z6/Z7 | 13.5 | 11.5 | -2.0 | |
| EUR | 110.86 | 110.76 | -0.10 | |
| CRUDE (CLV4) | 67.67 | 68.65 | 0.98 | |
| SPX | 5408.42 | 5626.02 | 217.60 | 4.0% |
| VIX | 22.38 | 16.56 | -5.82 | |
In: Eurodollar Options
An exciting Sept expiration!
September 13, 2024
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You start a conversation, you can’t even finish it
You’re talking a lot, but you’re not saying anything
When I have nothing to say, my lips are sealed
Say something once, why say it again?
Psycho Killer
Qu’est-ce que c’est? -Talking Heads
–Talking a lot but not saying anything. That’s the world we’re in. Post-Wednesday’s CPI the market became pretty darn certain that the Fed would only ease by 25. In yesterday’s note I posed the question, “Are you sure about that?” Yesterday the ECB cut 25, as expected. But, WSJ’s Nick Timiraos wrote a somewhat wordy article suggesting 50 as a possibility for Wednesday’s FOMC. October Fed Funds, which traded 9495 early (near the 25 bp cut price of 9492) rallied back to settle at 9499 and were 9500 bid shortly after settle. SFRU4 settled 9509.25 after posting a low of 9504.25, and this morning we’ve traded through the expiring 9512.5 strike! High as of this note is 9514. (Sept SOFR and midcurves expire today).
–Title of Nick Timiraos article: The Fed’s Rate-Cut Dilemma: Start Big or Small?
“That the Fed will cut rates at its meeting next week is all but settled, But how much is shaping up to be a close call.”
Last line, quoting former Fed vice chair Donald Kohn:
“We are at a point where you might say, ‘I could go either way- 25 or 50,’ but I think the risk management has shifted to the labor market and favors doing 50,” he said.
–It’s not all that frequent that the last couple of days before option expiration have this kind of juice. As of this morning’s prelims, SFRU4 had 1.35 million open positions, up 50k on the day. SFRU4 9512.5c had 382k, down 25k on the session. Adding to the day’s mix was a surge in gold to a new high. GCZ4 settled 2580.60 but was 2586 late and is currently just a buck shy of $2600. Looming over everything, but being ignored by most western media and ‘leadership’ is the threat of military escalation. From the Guardian: “Vladimir Putin sends direct threat to the UK over ‘act of war’ move against Russia”. Maybe it’s just me, but the Timiraos headline seems somewhat inconsequential by comparison.
–A couple of notable downside trades: +35k SFRZ5 9675/9600/9525p fly for 12.5. Settled 13 ref SFRZ5 9714.5.
Buyer of 47.5k 0QV4 9693.75/9675/9656.25/9637.5p condor for 5.0. This also has SFRZ5 as underlying, but expires 11-Oct.
https://x.com/AlexManzara/status/1834275418788053435
In: Eurodollar Options
Are you sure?
September 12, 2024
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–In the old days on the floor, when asking the pit for quotes by way of hand signals (and not realizing exactly where prices should be in active markets) there were times when quotes would be wrong. So, you might quote a call diagonal and get 4 bid/at 5 and it was really 4 ask. I always appreciated the client who would say, “Are you sure of that?” And of course, rather than get buried I would say, Nope, not sure, please give me a second to double-check that quote.
–Yesterday’s slightly stronger than expected CPI boosted the market’s certainty for a 25 bp cut next week rather than 50. SFRU4 sank 6 bps to 9505.25, and FFV4 fell 5 to 9495.5, nearing the 9492 price that should be the ultimate settle on 25. Are you sure about that? What I am definitely not sure about is stocks, where NQU4 traded lower early and then surged like a rocket into the end of the day, closing up 2% (+407) on a range of nearly 750 points. NVDA? Really?
–In any case the curve flattened. 2’s were up 3.4 bps in yield to 3.641% while tens and thirties added only 1 bp to 3.65% and 3.963%. 30yr auction today. On the SOFR strip, while U4, Z4 and H5 fell 6, 9 and 7, 2027 contracts were down only 0.5. Near 1-yr calendars made new lows, with U4/U5 below -203 (9505.25/9708.5) Z4/Z5 at -132, down 6 on the day (9585/9717) and H5/H6 -68, down 4.5 (9652.5/9720.5). The peak contract is currently SFRM6 at 9721, just 2.79%.
–Today’s news includes PPI expected 0.1 and 0.2 for Core m/m, with yoy 1.7 and Core 2.4.
Jobless Claims 227k
Household Net Worth and other data from Fed’s Z.1 quarterly report. HH net worth will be at a new high as S&P added a few percent last quarter.
In: Eurodollar Options
9/11
September 11, 2024
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–The trading floor always respected the moment of silence on the anniversary of 9/11
–If the payroll data didn’t provide a clear-cut signal for 25 or 50, it’s quite unlikely that today’s CPI will. Expected 0.2% with Core also 0.2% on m/m basis. YOY 2.6 from 2.7 last with Core 3.2 from 3.2. Markets, as evidenced by another strong rally in SOFR and treasuries, are clamoring for forceful rate cuts to counter increasing economic weakness. SFRU5 (strongest contract on the strip) was up another 7 bps to 9712 or just 2.88%. SFRU4/SFRU5 is sub-200 bps (9511.25/9712) New LOW. Ten year yield dropping like it’s on Ozempic, down another 5.3 in front of today’s auction, to 3.644% (More on that below). What IS going to decide 25 or 50? Stocks. The trend in inflation is unambiguously lower. A stronger number today would not likely change that trend, but might have a negative effect on stocks, which are currently a bit lower at 5484.25, -18.75 on ESU4.
–ALLY financial was crushed yesterday, down 18% partially due to increased auto loan delinquencies. JPM fought back from a drop of 7% to close down 5.2%. Not all financials were hard hit, but remember, no matter what they TELL you, the Fed’s main concern is soundness of the TBTF banking system. Mandates -inflation and employment – are really 1(b) and 2(b)
–Some exits of SFRZ4 long calls and call spreads. Example 25k SFRZ4 9600c sold at 14.5 covered 9590.5, 42d. Settled 16.5 ref Z4 at 9594.0. Think about that for a second: breakeven given premium of 16.5 is 9616.5 or 3.835%. In FOUR months. Current EFFR is 5.33%, so breakeven is around 150 bps lower. The press is hand-wringing about 25 or 50 for Sept, but SFRU4/Z4 calendar made a new low -82.75 bps.
–TYZ4 settled 115-14+ with cash marked 3.644%. DV01 on the contract is ~$68. The low in April of 2023 (as regional banks were imploding) was 3.31%. High settles in the front contract around that time were 116-30 to 117. The difference between yesterday’s closing yield and the 4/6/23 low is just over 33 bps, or a bit over 2.25 points (assuming parallel shifts). So futures would likely take out the 117 level in significant fashion on a return to that cash yield.
In: Eurodollar Options
Decades happen in weeks
September 10, 2024
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–Yields little changed on a reactive flattening day after Friday’s steepener to new highs. 2/10 remains above 0 at 3.2, with 2s up 1.3 bps to 3.665% and 10s down 1.3 bps to 3.697%. A couple of large option plays capture the election: +50k SFRX4 9612.5/9625cs 2.5 to 2.75, settled 2.5 ref 9591.0 in SFRZ4. New position, expires Nov 15, just past the Nov 1 payroll report, Nov 5 election and Nov 7 FOMC. In tens, buying of TYZ4 117.5 and 118c. 117.5c settled 39 with OI +11k and 118c settled 32, OI +19k ref TYZ4 115-015. These options expire Nov 22.
–Debate tonight. How’s this? Debate is a mess, stocks take another big tumble, Biden resigns to make Harris the new President, an ‘apolitical’ Fed cuts 50. “There are decades where nothing happens, and there are weeks where decades happen.” Lenin.
–3 year auction today, followed by 10s and 30s Wed and Thurs. Sept SOFR midcurves expire Friday.
SFRU4 9512.5^ settled 7.5 ref 9510.5
0QU4 9700.0^ 15.5 ref 9705.0
2QU4 9712.5^ 12.5 ref 9714.5
3QU4 9700.0^ 12.5 ref 9703.0
On Thursday prior to NFP, SFRU4 9512.5^ settled 13 ref 9512.25. Pretty accurate as Friday’s range was 9501.75 to 9524.25. 0QU 9687.5^ settled 25.5 ref 9692.5; contract had a range of 30.5 from 9681 to 9711.5.
In: Eurodollar Options
Pricing looks aggressive…for a reason?
Sept 8, 2024 – Weekly Comment
(NOTE: the Sept 9 daily note is BELOW. Out of order on days)
******************************************************************
Let’s start with October Fed Funds, the contract which most closely prices the September 18 FOMC. It settled 9499.5, down 2.5 on the day and unchanged on the week. Volume was a whopping 935k, but open interest barely changed, down 4k at 571k. Almost seems boring in terms of net price changes. However, Friday’s range was 9497 to 9512. Huge for a one-month contract near expiration.
On a 25 bp cut, EFFR should move from current 5.33% to 5.08% or 9492. On a 50 bp cut, EFFR should go to 4.83% or 9517. So, Friday’s range faded the two extremes by exactly 5 bps either way. The midpoint between 25 and 50 is 9504.5, so the settlement is favoring just 25.
Both Williams and Waller blessed a cut at the September meeting. A couple of excerpts from their speeches:
Williams (clear on a cut, but in terms of size, I would lean towards 25):
With the economy now in equipoise and inflation on a path to 2 percent, it is now appropriate to dial down the degree of restrictiveness in the stance of policy by reducing the target range for the federal funds rate. This is the natural next step in executing our strategy to achieve our dual mandate goals. Looking ahead, with inflation moving toward the target and the economy in balance, the stance of monetary policy can be moved to a more a neutral setting over time depending on the evolution of the data, the outlook, and the risks to achieving our objectives.
Waller (overall, more forceful than Williams. If we’re going to start, let’s start with 50. That’s my read. However, the market is suggesting caution on the first cut).
I believe our patience over the past 18 months has served us well. But the current batch of data no longer requires patience, it requires action.
But I also believe that maintaining the economy’s forward momentum means that, as Chair Powell said recently, the time has come to begin reducing the target range for the federal funds rate.
Furthermore, I do not expect this first cut to be the last. With inflation and employment near our longer-run goals and the labor market moderating, it is likely that a series of reductions will be appropriate. I believe there is sufficient room to cut the policy rate and still remain somewhat restrictive to ensure inflation continues on the path to our 2 percent target.
As of today, I believe it is important to start the rate cutting process at our next meeting. If subsequent data show a significant deterioration in the labor market, the FOMC can act quickly and forcefully to adjust monetary policy.
If the data suggests the need for larger cuts, then I will support that as well. I was a big advocate of front-loading rate hikes when inflation accelerated in 2022, and I will be an advocate of front-loading rate cuts if that is appropriate.
It was the “front-load” phrase that popped FFV4 up to 9512, but prices quickly retreated.
Now let’s look at SFRU4. On the day it settled -1.75 bps at 9510.5, up 2.25 on the week. Volume was the most of any SOFR contract at 1.7 million. Open interest fell by 44k to 1.3 million. Though open interest in calls fell by 97k, there are still 6.4 million open, max being the 9525 strike with 620k. That call settled 1.0. Expiration of Sept options is Friday. SFRU4 9500p settled 0.25.
SFRM4 is still trading, but has now been pegged by SOFR settings of the past three months. It settled 9463.0. Simplistically, add 25 or 50 and get 9488 or 9513. Then add about 23% of the expected move for the November 7 FOMC, as that date is a bit more than halfway through the contract term. At extremes, I would say 25 and 25 would yield a final settle around 9494 and 50 and 50 would be around 9524.5. Cuts of 25 and 50 would be in the neighborhood of 9500. In a way SFRU4 appears slightly expensive.
However, consider the next few contracts. SFRZ4 settled 9593.0, up 7.0 on the day, and 18.5 on the week; a new high settle (since Feb). U4/Z4 calendar settled -82.5, easily the most inverted a 3-month SOFR spread has traded.
The market obviously took Waller’s ‘front-loading’ comments to heart. SFRU4 to SFRH5, just a six-month spread, settled 9510.5 to 9656.5, nearly 1.5% of inversion. Extremely aggressive. However, SFRH5 at its high on Friday (9667) didn’t quite exceed the Aug 5 high of 9670.5, even though the settlement was higher.
SFRM5 DID exceed the August 5 high of 9695, posting a top price for the year of 9698 and a settle of 9691.0. 3.09% by next summer! SFRU5 also made a new yearly high and settle at 9711.5 and 9707.5s. The peak contract on the SOFR strip moved forward one slot to SFRH6 which settled 9718 against a high of 9719.5. This contract posted a low of the year at 9566.5 on April 30. It has rallied over 150 bps without an actual ease.
Now observe the chart below. It is the sixth quarterly (rolling) EURO$ contract back in 2007 to 2008. Prior to the first ease (of 50 bps) back in Sept 2007, the contract rallied from a low of 9450 to just above 9550. One hundred bps in a few months. I’ve noted the corresponding level on the chart with a helpful, “You Are Here” tag. From the September 2007 FF target of 5.25%, the Fed cut to 2% by the end of April 2008, 325 bps in a little over seven months. By the way, the sixth quarterly ED contract reached 9800, or 2% in March 2008.
I’ve argued it isn’t the same, that the household sector in aggregate is in much better shape than 2007, that it’s the government sector we need to be worried about, that the ‘terminal’ FF target shouldn’t be much below 3% this time around. However, the affluent sector of households that we’re all depending on to keep the economy chugging into a soft landing is heavily exposed to stocks and private equity. Maybe aggregate household leverage isn’t the same as 2007, but a rapid reset in equity values of the sort that we’re STARTING to see will erode confidence.
The real risk is that fiscal stimulus is dialed back in the new year. Seems unlikely that the private sector will be able to plug the hole.
News this week includes 3, 10, and 30yr auctions Tuesday, Wednesday and Thursday.
Consumer Credit for July is released Monday afternoon, expected $12b (old data)
CPI is on Wednesday expected 0.2 both headline and Core, with yoy 2.6% from 2.9% and Core 3.2% from 3.2%
PPI on Thursday, along with Q2 Z.1 report which includes Household Net Worth. That figure will be at a new record high as SPX rose about 4.5% in Q2. Just eyeballing it, a reversion to the trend from 2011 through 2019 would likely put this number (nominally) at $130T. In Q1 it was $152T.
| 8/30/2024 | 9/6/2024 | chg | ||
| UST 2Y | 392.3 | 365.2 | -27.1 | |
| UST 5Y | 371.3 | 349.0 | -22.3 | |
| UST 10Y | 390.9 | 371.0 | -19.9 | wi 370.8 |
| UST 30Y | 419.6 | 401.8 | -17.8 | wi 401.8 |
| GERM 2Y | 239.2 | 223.0 | -16.2 | |
| GERM 10Y | 229.9 | 217.2 | -12.7 | |
| JPN 20Y | 170.9 | 165.8 | -5.1 | |
| CHINA 10Y | 217.8 | 213.8 | -4.0 | |
| SOFR U4/U5 | -164.3 | -197.0 | -32.8 | |
| SOFR U5/U6 | -18.0 | -7.5 | 10.5 | |
| SOFR U6/U7 | 9.0 | 13.5 | 4.5 | |
| EUR | 110.51 | 110.86 | 0.35 | |
| CRUDE (CLV4) | 73.55 | 67.67 | -5.88 | |
| SPX | 5648.40 | 5408.42 | -239.98 | -4.2% |
| VIX | 14.96 | 22.38 | 7.42 | |
Ease now, ease (more) later
Sept 9, 2024
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–Though Friday’s employment data wasn’t soft enough to convince the market of a 50 bp cut at next week’s FOMC, deferred SOFR contracts made new highs. For the record, NFP was +142k and the Unemp Rate was 4.2%. Action was primarily in SOFR contracts; ten year yield fell only 1.5 bps to 3.71%. TYZ4 closed +8.5 at 115-005. Pre-data TYZ4 115^ was 3’02/3’04, it immediately sank to 2’57/2’59 and settled 2’59. TYV4 115^ went from 1’33 to 1’15. This week’s main events are the Presidential debate tomorrow, CPI Wednesday and treasury auctions of 3s, 10s, 30s starting tomorrow.
–As noted on weekend piece, SOFR spreads recorded extreme closing levels. SFRM5 was the star performer, closing +16 at 9691, or 3.09%, vs current FF of 5.25-5.5%. SFRU4 settled -1.75 at 9510.5, but SFRZ4 was +7.0 at 9593. The 3-month spread of -82.5 bps is easily a new low. The message seems to be, ‘if the Fed doesn’t ease 50 at the Sept meeting, then it may have to cut more forcefully post-election.’ SFRU4/SFRU5 settled with nearly 200 bps of inversion: 9510.5/9707.5 or -197. FFV4 settled -2.5 at 9499.5, leaning closer to a 25 bp ease (9492 or 5.08%). FFF5 which captures FOMCs on Sept 18, Nov 7 and Dec 18 settled 9584.0 or 4.16%. Current EFFR is 5.33% so that’s 117 bps of ease over three meetings.
–If the buying was all up front (H5, M5, U5 strongest) then it makes sense that the curve steepened from there, which indeed it did. 2/10 at new high near +6 bps, with 2’s -9.4 bps to 3.652 and 10’s down 1.5 at 3.71%. 5/30 spread also posted a new high at +53. Ten-yr breakeven ended just above 2% at 2.036.
–Markets are pulling back this morning. TYZ4 prints 114-20 which is under Thursday’s close of 114-24. Stocks have rebounded as $/yen has popped from Friday’s drubbing, now 143.48. Today’s news includes Consumer Credit for July, a lagging piece of information, but it still may provide hints on the state of the consumer. Expected +$12b.
Got a lot priced in
September 6, 2024
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–Big data today: NFP expected 165k vs last of 114k. Unemp rate expected 4.2 from 4.3.
–October FF settled 9502, a slight bias for 25 bps at the Sept 18 meeting. SFRU4 settled 9512.25. High settle Aug 5 in FFV was 9517, exactly pricing a 50 bp cut. High settle in SFRU4 on Aug 6 was 9528.5. I think today’s range will be capped by 9525 to 9529 on weak data and will have a floor of 9503 to 05. My guess for ultimate settle on 13-Sept is 9525 to 30. I think today’s data will be weak and given that the FOMC is 2 days after what is likely to be a contested election marked by sporadic violence, I think the market will lean heavily for another 50 in Nov.
–Ten year breakeven made a new low just above 2%; I marked at 2.045.
–Seller of 50k SFRH5 9675/9750/9775/9850 at 9.25 (exit of 9675/9775cs and now long 9750/9850 which settled 6.5 ref 9643). Market obviously expecting (or fearing) large eases. Consider SFRM5 which settled 9675 or just 3.25%. The M5 9875c settled 12.5, 125 otm, a strike price of 1.25%. The equidistant put, the 9550 strike, which is STILL lower than the current FF rate by 75 bps, settled 4.5. New low in SFRU4/U5 1-yr calendar at -180.25 (9512.25/9692.5).
–One interesting trade, buyer of Wednesday Week-2 (Sept 11) 113.75p for 10 in size 12k. The 113.5p also traded 19k. Settles were 11 and 7 vs TYZ4 114-24. Apart from being a solemn anniversary, CPI and 10y auction are on that date. (Hard to find these settles on CME website, symbol is WYW near the end of the Treasury Daily Bulletin page).
–Best of luck today.
Pressing into NFP
September 5, 2024
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–Impressive strength in short-end rate contracts as JOLTs continues to make new lows. From a high in job openings of 12182k in March 2022, it’s now 7673k. For the sake of comparison, pre-covid high in late 2018 was 7594k. SFRM5 was the strongest contract on the strip, settling +16 at 9674.0. Highest settle in this particular contract since Jan 12 at 9681.5.
–A lot of recent extremes posted on Wednesday, somewhat surprising in front of NFP tomorrow:
New low SFRU4/Z4 -74.25 (9513.25/9587.5) Post-election the Fed’s axe is going to swing?
New low SFRU4/U5 -177.75 (9513.25/9691) Nearing the low of any 1-yr calendar which I believe was -192
New high settle SFRM5…strongest contract on the strip +16 at 9674. Yield of 3.26 is 200 bps below the low end of current FF target 5.25%
New high SFRM6 9706… pressing thru 3% and highest in this slot since the regional banking crisis in Q2 2022. SFRM6 is currently the PEAK contract on the SOFR strip.
New high 2/10 just above zero, highest since July 2022. (3.766/3.767)
New high 5/30 50 bps, highest since March 2022…(which is when the hiking cycle started)
New low 10yr breakeven (treasury – tip) at 206.6 bps.
–There was quite a bit of trade in week-1 (expiring tomorrow) TY puts. TYZ4 settled 114-18, I think BBG might be making a big deal out of a buy of 50k wk1 112.5p bought for 1. It was a cover, as OI fell 48k. 113.25p settled 2, OI rose 12k on 30k of volume. Closer to the money, 114p settled 13, traded 42k and OI was up 13k. The 114 strike is somewhere around 8 bps otm. Not nearly as much call volume. Wk-1 115c settled 15, traded 26k and OI rose 12k. A price of 28 for a 1-point 114/115 strangle is pretty juicy, but for now we’ll just chalk it up to uncertainty.
–News today includes ADP expected 145k, Job Claims 230k, S&P Global PMI Comp 53.9 vs 54.1. ISM Services 51.4 from 51.4
As a follow-up to yesterday, Cap Goods Orders nondef ex-air was -0.1 and Shipments were -0.3…continued weakness
–Are they stopping us?
I think a price of 9674 in SFRM5 is sort of crazy. But I felt the same way 10 to 15 bps lower. There was a new buyer of 10k SFRM5 9700c for 33.5. This is when a pure trading mentality takes over…the fundamentals are nebulous. The only question is, are there sellers stopping the buyers. We’re not thinking about the actual PRICE, just whether or not it goes up from here.
https://x.com/concodanomics/status/1831384368407023933
