Large Amount of Capital Vanished
September 4, 2024
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–Treasuries bid on weakness in equities. SPX down 2.12%, Nasdaq Comp -3.26% and NVDA -9.5%. Crude oil (CLV4) plunged 3.21 to 70.34, and as of this note is sub-70 at 69.93. I’d wager that if we get a few more days like this in stocks, the Fed will cut 50, but for now the bias is still for just 25. FFV4 settled +2 at 9501.5; the dividing line for 25 or 50 is 9504.5.
–SFRZ4 settled +1.5 at 9576, but there was a large exit of 40k SFRZ4 9525/9575cs around 43 bps. Price of 9576 is 4.24% yield. We’ll get a new SEP at the September FOMC, but in June the Fed’s estimate of end-of-year FF was 5.1%. For end of 2025 it was 4.1%…the market has moved that timetable up by ONE YEAR! Well, not exactly, FFF5 settled 9570 or 4.30%.
–Today’s news includes Trade Balance and JOLTs, expected 8100k. Capital Goods orders and Shipments as well, along with Beige Book in the afternoon. In an interview on Thoughtful Money, Lacy Hunt mentioned Capital Goods Shipments (ex-defense and air) as a key economic component, and noted that July’s data had been revised lower, making the nominal value lower than it was in Q2. The softness in CapEx, even across tech shipments, is a negative development for forward growth. On the link below, 46:00 to 48:00 minute.
TYZ call buying
September 3, 2024
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–Friday featured higher yields, with 10s up 4.4 bps to 3.909% and 30s up 4.6 bps to 4.196%. 2/10 spread once again threatening to go positive, ending at -1.4 bps. On 7-Aug this spread reached -2.5 bps; these are the highest levels since July 2022. For now, it can be considered a double top with the interceding low on 19-Aug at -20 bps. However, the upward trend this summer has been powerful, having rallied from -50 in late June. Buy pullbacks.
–Some reasonably large new buys in TYZ calls Friday: TYZ 116c covered 113-165, 39 paid 10k. TYZ 117c 28 paid 9k. TYZ 116.5/117c stupid cov 113-19 with 50d, 61 paid 12k. With TYZ4 113-18s calls were 40, 33, 27 at settle.
–News today includes ISM Mfg, expected 47.5 from 46.8. Construction Spending 0.1 from -0.3.
Treasury yields since the start of 2024
September 3, 2024
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Treasury yields since the start of 2024
Sept 3, 2024
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At the QRA in October 2023, Yellen loaded issuance with t-bills rather than coupons. Along with other factors, the result was a huge decline in yields into the end of December, accentuated by Powell’s dovish pivot at the December FOMC.
As the charts below show, 5’s tumbled from just under 5% to 3.8%.
Tens went from exactly 5% to 3.8%. And the 30-yr went from just over 5.1 to 3.93%. This year saw a rebound in yields into April, and now a renewed decline, as labor market conditions decelerate.
I think it’s instructive to look at end-of-year lows vs the current decline. Fives have edged to a lower level, but tens held the Dec low and are tentatively edging higher, and 30s never really reached end-of-year lows. The differences aren’t exactly dramatic, but they do reinforce the theme of curve steepening, and make buying the long end a bit problematic, at least until new lows in yields are actually made. Until then, 3.95% should be considered a floor for the 30yr bond yield.
SOFR OPEN INTEREST IS RELATIVELY LOW
September 2, 2024
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Anyone have a good reason for this??
Sept 2, 2024
In 2018 the Fed was gently hiking rates. Peak FF level was 2.25 to 2.5%.
At the time, PEAK OPEN INTEREST in eurodollar futures (aggregate) reached over 18 million as the chart below shows.
(blue line is aggregate open interest. ED1 is rolling first quarterly Eurodollar contract)
Eurodollars are now long gone, replaced by SOFR contracts. SOFR futures aggregate open interest is near a record, but it’s only 11.276 million in total. As the chart below shows, that’s with the Public Debt increasing 16% in two years.
I’m assuming 2y, 5y and 10y treasury futures have siphoned off a lot of open interest that might have otherwise gone into SOFR. All have recently hit record highs, TU 4.49m contracts, FV 6.95m and TY 5.516m. In fact, in 2018 when ED open interest surged, FV OI peaked at 5.076m. Last month’s FV peak OI was 37% higher. Perhaps ERIS SOFR swaps have taken a share.
One of the trades that has been lost is ED contracts vs Treasuries, as the credit aspect of STIRS was eliminated with SOFR.
I’m not drawing any big conclusions, just posting for interest.
(white line is 3rd contract slot, currently SFRZ4. Blue line is aggregate open interest. Purple in lower panel is public debt).
Nominal might be more real than Real
September 1, 2024
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On Saturday I created the following two charts, covering two different time periods (pre- and post-covid). On the top panel of each are the Midpoint of the FF target range (blue), Real GDP (amber) and yoy PCE price changes (green). On the bottom panel is the yoy change in nominal GDP.
I was thinking about how some people are adamant the Fed should not ease, because what Powell deems as “restrictive” policy, really isn’t doing all that much to stifle (real) growth.
First, consider the top chart, which covers 2014 to 2019. Around the middle of 2016 PCE prices started to accelerate, from below 1% to just above 2%. Real GDP was stair-stepping higher as well. Powell took it as an opportunity to begin ‘normalizing’ policy. Going into 2018 (when Trump’s tax cuts were moved over the finish line) real GDP topped as inflation moved higher, but nominal GDP kept marching up. In Q4 2018 SPX tumbled by 20%, and both real and nominal GDP declined. PCE had topped at 2.3% in Q3 2018 but was under 1.5% by Q1 2019. The peak FF rate of 2.375% was above PCE prices and exceeded real GDP for a couple of quarters, but was always well below nominal GDP. NOTE: Real GDP is adjusted using the GDP Deflator, not PCE prices.
Now consider the chart below from post-covid to present. FF are above real GDP and have been above PCE prices since Q2 2023 (restrictive). At the low, nominal GDP grew by 5.6%, just a little above the FF target of 5.375%. The other thing to notice is that nominal GDP has been decelerating for the past two-and-a-half years. Just these metrics provide justification for easing, though it’s debatable if the 200 bps being priced by September of next year is reasonable. [FFV5 is 9675.5 or 3.245% vs the lower end of the current FF target of 5.25%]
The inclusion of Nominal GDP made me think of the Michael Lewis book ‘The Undoing Project’. This is a fascinating read about human decision making. Here’s an excerpt:
The theorists seemed to take it to mean “the utility of having money.” In their minds, it was linked to levels of wealth. More, because it was more, was always better. Less, because it was less, was always worse. This struck Danny as false. He created many scenarios to show just how false it was:
Today Jack and Jill each have a wealth of 5 million,
Yesterday, Jack had 1 million and Jill had 9 million.
Are they equally happy? (Do they have the same utility?)
Of course they weren’t equally happy. Jill was distraught and Jack was elated. Even if you took a million away from Jack and left him with less than Jill, he’d still be happier than she was. In people’s perceptions of money, as surely as in their perception of light and sound and the weather and everything else under the sun, what mattered was not the absolute levels but changes.
Maybe relatively low levels of confidence are related to the deceleration of nominal income even though the level itself is solid. Consider this as well: Money Market Fund assets stand at $6.26T. At a yield of 4.75% that’s about $300b per year or 1% of GDP. Perhaps Rick Rieder’s comments from several months ago ring true… the economy and inflation may well SLOW on rate cuts. That $6t isn’t anxiously sitting on the sidelines just waiting to be deployed into equities…oh, maybe some of it is. But most of it is sitting there saying, if nominal income is just a little over what I am making in a money market, and if stocks in aggregate are making somewhere around nominal income, why should I take risk vs a sure thing?
One of the other key lines from this section of the book is: “When they made decisions, people did not seek to maximize utility. They sought to minimize regret.” An example:
You must choose between having :
1) $5 million for sure
or, the gamble:
2) An 89% chance of winning $5 million
A 10% chance of winning $25 million
A 1% chance to win zero
Most people chose 1. They preferred the certainty of being rich to the slim possibility of being even richer. “If people mostly chose option 1, it was because they sensed the special pain they would experience if they chose option 2 and won nothing.”
“But what was this thing that everyone had been calling ‘risk aversion?’ It amounted to a fee that people paid, willingly, to avoid regret: a regret premium.”
In today’s lexicon, FOMO captures regret premium in another dimension, the fear of being Jill when Jack is printing money being long NVDA. The Fed is well aware that changes at the margin drive the economic narrative. I think Powell is, in part, managing risk in order to avoid a repeat of late 2018, when the Fed was blamed for a sharp setback in stocks and had to reverse course in 2019.
Perhaps this meandering stroll about decision making is a bit much, only to justify rate cuts which the market is already aggressively pricing into next year. On the other hand, the deceleration of nominal GDP, which is rarely mentioned, is likely more important to the nation’s economic psyche than published real GDP data. But here’s another tangible event which is likely to weigh on the economy. BBG reports the end of $1.6T student loan leniency… set to conclude at the end of September. More than 40 million Americans have federal student debt.
I’ll just end with a decision-making story from CME days, which I found perfectly reasonable in terms of avoiding ‘special pain’ no matter how miniscule the odds. On the first floor of the CME was a concession stand that sold candy, sundries, lottery tickets. There was a large lottery and I was in line behind another member who was wearing his trading jacket as well. He placed his order and the clerk said ‘fifty dollars’. The guy whined, ‘I asked you for just FIVE dollars worth.’ I interjected and said, ‘No problem, I’ll take the other $45.’ The customer turned around, looked at me, looked at the acronym on my trading badge, and said to the clerk, ‘I’ll take all fifty.’ Suspicion, superstition, paranoia. It’s hard to model those aspects of a snap decision, even for AI. Of course, when it was my turn I said, ‘I’d like $50 as well, and I want the exact same numbers as that guy.’ Just kidding, I took the random draw.
This week culminates with Employment data, which is once again the most important data release. NFP expected 165k with a rate of 4.2%.
The main feature of what was a pretty quiet week was curve steepening. Tens rose 11 bps on the week to 3.909%. 2/10 ended at -1.4 bps (3.923/3.909), the highest level since mid 2022. The halfway back level from the high in March 2021 of 157.6 to the low of June 2023 of -108.7 is just under 25 bps (next target). On the SOFR strip, the weakest contract was March’28 which settled down 9 on the day at 9676. H5 -5.5 at 9624.5, H6 -6 at 9688, H7 -8 at 9686.5 and then H8 at 9676. Modest but surprising weakness in back end of curve.
| 8/23/2024 | 8/30/2024 | chg | ||
| UST 2Y | 387.3 | 392.3 | 5.0 | |
| UST 5Y | 362.3 | 371.3 | 9.0 | |
| UST 10Y | 379.9 | 390.9 | 11.0 | |
| UST 30Y | 410.1 | 419.6 | 9.5 | |
| GERM 2Y | 237.4 | 239.2 | 1.8 | |
| GERM 10Y | 222.5 | 229.9 | 7.4 | |
| JPN 20Y | 170.1 | 170.9 | 0.8 | |
| CHINA 10Y | 215.5 | 217.8 | 2.3 | |
| SOFR U4/U5 | -168.5 | -164.3 | 4.3 | |
| SOFR U5/U6 | -19.0 | -18.0 | 1.0 | |
| SOFR U6/U7 | 7.0 | 9.0 | 2.0 | |
| EUR | 112.11 | 110.51 | -1.60 | |
| CRUDE (CLV4) | 75.54 | 73.55 | -1.99 | |
| SPX | 5634.61 | 5648.40 | 13.79 | 0.2% |
| VIX | 15.86 | 14.96 | -0.90 | |
Excerpts from The Undoing Project are from pages 257 to 267.
Roll Calls
August 30, 2024
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–Yields rose as Q2 second estimate GDP proved stronger than expected at 3.0%. Weakest contracts on the SOFR strip were Z4 and H5, both down 3 on the day (9576 and 9627.5). Deferred contracts -2 to -2.5. The lean for a 25 bp cut rather than 50 at the Sept 18 FOMC increased, but the outcome is far from certain, and may have to wait for next week’s NFP for market expectations to solidify. Curve was stagnant, with 2s -2.7 bps to 3.89% and 10s -2.6 to 3.865%. 2/10 remains close to its recent high at -2.5 bps, threatening to dis-invert. FFV4 settled 9500.5.
–Today’s news includes PCE prices, expected yoy +2.5 to 2.6 (vs 2.5 last) and Core +2.7%. Powell downgraded the importance of the inflation mandate vs labor at Jackson Hole, so today’s data is not likely to shake things up unless there’s an outlier. Chicago PMI follows, expected 45.6 from 45.3 last.
–There were a flurry of late trades in TY options, mostly a roll of long October calls into December:
Sells on block
TYV 115.0c 10k at 22
TYV 115.5c 9k at 15
TYV 116c 15k at 9
all covered 113-28+, 70d
then new buys:
TYZ 116c 45 paid 30k
TYZ 117c 31 paid 30k
TYZ 111p 29-30 paid 30k
(deltas on 117c and 111p both 21, delta on 116c is 29
Net bias to upside.
TYX 114 straddle, paper sells 10,000 at 2-19 (settled 2’18)
**Abbreviated screen session on Monday’s holiday. Won’t be in.
NVDA approximately priced “right”?
August 29, 2024
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–Stock futures sold off going into NVDA earnings, and fell further post-call, but are higher this morning. SMCI was down over 25% yesterday, though it rallied back with a loss of only 19% at 443.49. In March this stock traded over 1200, yesterday the low was just under 400, a drop of 2/3rds. Of course, its market cap is less than 10% of NVDA, but it’s still a dramatic move for a former darling.
–Rates were quiet. Net change on SOFR strip +0.5 to -1.0. Tens rose 2.3 bps 3.839% in front of today’s 7-year auction. Other news today includes Jobless Claims expected 232k and the 2nd revision of Q2 GDP. PCE prices are released tomorrow, expected 2.6% yoy with Core 2.7%, both up 0.1 from last month. TYV4 114^ settled 1’37 ref 114-025. To get the same vol all else equal on Sept 3, the straddle price would have to be 1’23…likely to be some weight on premium today and Friday.
Quart of Blood
August 28, 2024
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–SFRU4 settled 9509.5 as the market modestly adjusted odds on easing. The lean is still for 25 rather than 50 at the Sept meeting, but it’s a pretty small bias. SFRU4/U5 settled at a new low -170 (9509.5/9679.5).
–The morning featured large TY call buys:
+50k TY wk1 114c cov 11330, with 49d, 33 paid. (1’06 in straddle). Settled 38 vs 114-03. Call OI +50k. Sept 6, NFP, expiry.
+17k TYV 114c cov 113-29.5, 49 paid (1’39 in straddle). TYV 114^ settled 1’38 (Call 54s)
–On Monday morning TYV 113p had been bought in size 50k for 18.
–Treasury curve steepened. 2’s fell a few bps in yield to 3.901% (good auction) while tens rose 1.7 to 3.833%. SFRH5 best performer, +4.5 to 9631.5, while H6 was up 1.5 to 9695.5 and H7 was unch’d at 9694.0. Five-yr auction today.
–Post settlement Gold (GCZ4) edged above 2560.
–The big news today is, of course, NVDA earnings. It’s like the Quart of Blood technique. Might be the longs, might be the shorts, but a quart of blood is gonna drop out of one side. Maybe both. Over $3T market cap trading at nearly 30x SALES.
Below is Corn priced in Gold…new ALL-TIME low.
Time to buy an RV? Or Rolex
August 27, 2024
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–Last week PDD (parent of Temu) traded 150. Today, after warning on revenue, it’s 100. A BBG headline says this: crash “…Sends a warning on Chinese Economy” but it’s likely more than just China. Nasdaq Comp down 0.85%… NVDA reports Wednesday. Vast amounts of capital can appear or evaporate very quickly in this environment.
–Rates were quiet, though there were a couple of interesting large trades. SFRU4 9512.5/9518.75/9525c fly traded 0.25 about 20k and settled there ref 9507.75. The b/e is 9512.75 to 9524.75…pretty wide window with 23 days until FOMC. Why count the weekends instead of just trading days? Because a big geopolitical bomb could go off on any given day. As an aside, CLV4 up 2.59 yesterday to 77.42 on Mideast spiral.
–New low settle in SFRU4/U5 1-yr calendar at -168.75; traded as low as -172.5.
–Also a buyer of 50k TYV4 113p for 18, and then 112.75p, paid 18 for about 30k. New positions: TYV 113p settled 22 with OI increase of 36k and 112.75p settled 18 with OI +39k. On the day, total TY futures OI +91k to 5.522m. Bearish signal even though 10y yield only rose 1.7 bps to 3.816%. 2yr auction today, followed by 5’s and 7’s Wed, Thurs.
–Consumer Confidence expected 100.9 vs 100.3 last.
–Just a couple of anecdotal clips indicating that all is not well. The first is from watchcharts.com The luxury watch market is sliding (but at least it’s holding better than that Winnebago you bought post-covid!)
From ZH:
RV Downturn Turns Apocalyptic With Largest Dealership Offering 55% Discounts
LazyDays Holdings (GORV) an RV retailer, has seen its stock slip from 3 in December to 1.75 yesterday.
https://www.zerohedge.com/markets/rv-downturn-entering-apocalyptic-mode-largest-dealership-offering-55
Could NVDA earnings be the deciding factor for 25 or 50?
August 26, 2024
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–Powell said “the time has come for policy to adjust”. That was last week’s story. This week the focus will be on NVDA earnings on Wednesday, or at least that’s what I am led to believe by scanning financial sites this morning. Dan Ives of Wedbush says NVDA earnings make this the most important week for the stock market of this year, and maybe beyond. I view that as somewhat fanciful, but we’ll see.
–New low settles on Friday in near SOFR calendar spreads. SFRU4/Z4 3-month spread settled -69, down 4 on the day (9509.5/9578.5). SFRU4/SFRU5 one-yr settled -168.5, down 7 on the day (9509.5/9678). While the market is undecided about whether the first ease next month will be 25 or 50 (currently leaning for 25) the easing post-election is being priced forcefully. The high contract on the SOFR strip is SFRM6 at 9697. I continue to view 3% as a soft cap on the forward part of the strip. It might not ultimately be the “terminal rate” but I think the market will be reticent to price for anything sub-2.5% in this cycle.
–2s, 5s and 7s are auctioned Tues, Wed, Thursday. PCE prices are Friday.
–Treasury rolls are in full swing, with about 550k TY rolled Friday, 32% complete as of Friday’s close.
