Priming for an ease
July 16, 2024
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–Goldman opined that the Fed has solid rationale for a July rate cut; Moody’s had also said something similar. (FOMC is July 31). With current EFFR at 5.33% or 9467, August Fed funds surged up to 9473 before falling back to 9468.5, an unchanged settlement. FFV4 which captures the Sept FOMC meeting as well as July’s, ticked up to 9499 and settled 9494, up 1.5 on the day. A 25 bp rate cut should put the new EFFR at 5.08% or 9492, so a print at 9499 begins to reflect significant concerns that a cut of 50 could occur. A couple of days ago, SFRU4 9500c were sold at 3.0, yesterday settled 5.0 with SFRU4 +2 at 9496.5.
–Powell expressed greater confidence that inflation is moving in the right direction. I’m not sure how much weight should be given to anecdotal evidence, but a friend who is involved with a private airport near Chicago said that business travel is rapidly slowing (thanks DK); last month’s fuel sales were the lowest in years. WSJ has a headline: Evictions surge in major cities in the American Sunbelt. BBG: Salesforce Cuts More Jobs in Latest Sign of Tech Austerity.
-Given a shift in sentiment toward near-term ease, the curve continues to steepen. 2y note fell 1 bp to 4.453% while tens rose 4.2 bps to 4.229%. 2/10 ended at a new high -22.4. On June 27, just over 2 weeks ago, I marked SFRU5/SFRU8 at -47 (9587.5/9634.5). Yesterday it settled -14.5 (9624/9638.5), a surge of over 30 bps. [notice that the price of SFRU8 barely changed]. In tens, there was a late buyer of 30k TY week-1 111.25p for 46. Settled 48 vs 110-315, Settlement date is 2-August, on which NFP will be released. Seeing a small bounce in treasuries this morning with TYU4 111-09.
–Kugler speaks today at 2:45 on ‘…Economic Measurement and Creative Solutions’. I guess that just means changing the data! Retail Sales as well, expected -0.3%, but ex-auto and gas +0.2%. From the St Louis Fed website, I pulled the chart below on Retail Sales (nominal). The recent slope of the curve is surprisingly flat given inflation levels of 4-6%. According to my measurements, from April 2022, when the Fed had just started to hike, to May 2024 (last data on chart), total nominal retail sales were up just 3%…over TWO years. Real Retail sales are soft. But maybe we can just measure them differently.
Market reaction muted
July 15, 2024
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–Market reaction to Trump assassination attempt is muted. Republican Nat’l Convention begins today. Powell interview with David Rubenstein, Chair of the Econ Club of Washington, DC, at 12:30. Powell likely to emphasize slowing labor market.
–Curve steepened to new recent highs on Friday, with 2/10 +4 bps to -27.5 and 5/30 +1 to 29. Front SOFR calendars made new lows and deferred spreads made new highs as the reds, second year forward, led the rally, settling +3.75. Greens +1.5, blues -1 and golds -2. Both U4/Z4 and Z4/H5 3 month calendars settled at new lows, -39 and -37.5. Near term easing is being priced somewhat forcefully, with SFRU4 to SFRH5 -76.5, over three-qtr pct in the span of six months.
–Empire State Mfg today expected -6.0. Treasury vol and VIX near the year’s lows. TYU 111^ settled 1’40 from 1’44 Thursday. TY vol graph below.
Missed Me
July 14, 2024 – Weekly Comment
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Post-debate a client had mentioned that the possibility that a Trump win could lead to a Fed HIKE. I dismissed that idea, but after yesterday’s assassination attempt on Trump, perhaps that scenario deserves small odds. The hike part that is, the other is becoming more of a given. Amazingly enough, I had just received one of those “your memories from this day” emails with this particular chart:
I don’t know that Small Business Optimism necessarily translates to economic dynamism. And, the initial plunge in 2020 was likely more associated with Covid than Biden. However, since the middle of 2022, NFIB has never been able to get above 92; this year’s range is 88.5 to 91.5, well below Trump’s average of 104 to 105.
In the week that just passed, Powell leaned slightly dovish in his semi-annual Congressional testimony. A monthly CPI print of -0.1 (3.0% yoy) supports the narrative that inflation is moving sustainably toward target. Focus has shifted to the labor market. An ease for September is now fully priced, with October Fed Funds settling 9492.5 or 5.075% just more than 25 bps below the current EFFR of 5.33%.
As the market gains confidence for near term easing, the back end of the curve steepened. 2/10, which hasn’t been positive since the middle of 2022 (the first hike was in March 2022) closed at -27 (4.462 / 4.187). The ytd low was -50 just three weeks ago on June 25. There should be resistance at -16, a double top from Oct 2023 and January of this year. A close above that level would suggest a target of +20 to +25. I expect that stimulative measures associated with a Trump win would lead to more pressure on the back end of the curve. On the other hand, the current administration has every incentive to juice the economy right NOW. At the end of the month the Quarterly Refunding Announcement could again favor bills over coupons (as it did in Oct 2023, helping to ignite an ‘everything’ rally). The TGA is currently $722 billion. From Q3 2022 to May 2023, it was drawn down from $690b to $48b. I’d wager we will see a rapid drawdown in the next few months, pumping direct fiscal stimulus into the veins of the US economy.
I am simply adding a couple of other charts of interest. The first is the ‘Buffet indicator’ of total US Market Cap to GDP. It’s hard to see on the chart, but it is now at a record 196%.
https://www.longtermtrends.net/market-cap-to-gdp-the-buffett-indicator/
Second, here is a chart of the MOVE index, a measure of implied volatility in treasuries. It ended the week near the low of the year, as yields eased in the context of a steepening curve with inflation concerns receding. VIX similarly closed near the low of the year at 12.46; in fact it’s near the post-covid low. Insurance is cheap.
| 7/5/2024 | 7/12/2024 | chg | ||
| UST 2Y | 459.7 | 446.2 | -13.5 | |
| UST 5Y | 421.6 | 411.1 | -10.5 | |
| UST 10Y | 426.9 | 418.7 | -8.2 | |
| UST 30Y | 446.7 | 440.1 | -6.6 | |
| GERM 2Y | 288.9 | 282.3 | -6.6 | |
| GERM 10Y | 255.6 | 249.6 | -6.0 | |
| JPN 20Y | 193.3 | 187.0 | -6.3 | |
| CHINA 10Y | 227.3 | 225.9 | -1.4 | |
| SOFR U4/U5 | -114.5 | -128.0 | -13.5 | |
| SOFR U5/U6 | -34.5 | -30.5 | 4.0 | |
| SOFR U6/U7 | -4.0 | 0.5 | 4.5 | |
| EUR | 108.40 | 109.08 | 0.68 | |
| CRUDE (CLU4) | 82.26 | 81.02 | -1.24 | |
| SPX | 5567.19 | 5615.35 | 48.16 | 0.9% |
| VIX | 12.48 | 12.46 | -0.02 | |
Cutting (talking rates here, not Joe)
July 12, 2024
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–CPI hadn’t had a negative monthly print since covid, and yesterday the headline was -0.1% (yoy 3.0) with Core +0.1% (yoy 3.3). Rate futures surged. Curve steepened with the 2-yr down 12.5 bps to 4.505% and ten-yr down 9 bps to 4.191. 2/10 did not quite end at a new high (-31.4) but 5/30 did (+28.0). October Fed Funds (FFV4) settled up 5.5 bps at 9492 or 5.08%, exactly pricing a 25 bp cut from the current EFFR of 5.33%. SFRU4/SFRZ4 settled -37.5 (9493.5/9531) a new recent low. Given that an ease at the Sept 18 FOMC is being fully priced, another 1 to 2 priced for SFRZ4 is somewhat aggressive. However, it’s not out of the question to imagine a 50 bp cut if the data go pear-shaped. The political situation in the US is still… shall we say… fluid. Could that lead to a decline in business confidence?
–SFRU4/SFRU5 settled -124.5. down 10.5 on the day! Almost exactly 5 eases. That’s not, of course, a projection of an exact rate cut schedule, it’s just a range of various odds. But the spread is still equal to 5 cuts! And the KRE (regional bank ETF) was looking for just that sort of liquidity lifeline to get out from under the black cloud of commercial real estate. KRE surged +4.2% to the highest level since January, while SPX was -0.9%. Amazing rotation from Nasdaq to Russell with Nas Comp -1.95% and R2K +3.6%. Big bank earnings today including JPM, C, WFC.
–Note that treasury vol ended at new recent lows. I marked TYU4 111^ at 1’44 or 5.5% (from 5.7). The Sept atm 110.5^ on Monday was 1’56 or 6%. The drop in yields is not related to any type of ‘flight to quality’ panic, rather it’s just relief that funding rates will be coming down. However, there is still a sense that forward rates are limited in terms of how low they can go. Not an environment that sparks a mad grab for premium. The peak contract on the SOFR curve has moved forward a couple of slots and is now SFRH7 at 9653, or around 3.5%. The 5y yield ended at 4.123%. A new catalyst could be lurking around the corner, but lower funding rates can paper over a lot of chronic problems, at least in the short term.
–PPI today expected 2.3% yoy with Core 2.5 from 2.3.
–Heavy trade yesterday, but one noticeable (pre-data) exit was the sale of >50k SFRZ4 9475p at 2.0. On Wednesday there was a buyer of >50k SFRZ4 9525/9550cs for 6.5, and the contract magically vaulted above the lower strike yesterday, settling 9531 (+10.5) with open interest up 32k. The call spread settled 8.75. Nice one.
Inflation improving, job market weakening
July 11, 2024
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–Powell says he needs better data to increase his confidence that inflation is sustainably moving towards the 2% goal. Probably get it today (though he again said yesterday that the Fed’s focus is mostly on PCE prices). CPI expected 0.1 with Core 0.2 m/m. Yoy expected 3.1 from 3.3 with Core 3.4 from 3.4. He also again indicated that emphasis has shifted more towards labor market conditions.
Additional releases today:
Real Avg Weekly Earnings yoy 0.5% last
Jobless Claims 235k
30-year auction.
–SFRU4 options expire 13-Sept and the FOMC is 18-Sept. SFRU4 settled 9487.5. SFRM4, which still trades, settled 9464.75. So Sept is close to reflecting an ease (spread of -22.75), as is FFV4 which settled 9486.5. The big trades were in SFRZ4 options. SFRX4 9525/9550/9575c fly bought for 3.5, 25k (expires after election and Nov FOMC), and SFRZ4 9525/9550cs 6.5 paid for 65k covered 9521 with 20d. Both trades are new, and obviously work best as SFRZ trades above 9525. The contract settled 9520.5 with an increase in open interest of 29k. SFRU4/Z4 three-month spread settled -33. SFRZ4 options expire 13-Dec and the FOMC meetings are 7-Nov and 18-Dec. Eases at the last three meetings of the year, Sept, Nov, and Dec, would likely result in the 9525/9550c spread gaining full value.
–Another interesting curve trade, +10k SFRH5 9600c/-10k 0QH5 9700c for flat. Both calls settled 16.0, but the front is just 47 otm (9553) while 0QH is 67 otm as SFRH6 settled 9533. This trade works best on aggressive, forced easing. The roll is a headwind, as Z4 9600c settled 4.25 and 0QZ 9700c settled 9.25. (9520.5/9616.5).
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This is a rather interesting post with link below (thanks TMS):
chart ranks all $SPX 1m realized vol outcomes from high to low since 1990. At 5.4% right now, we are in the 1st percentile of outcomes. 1m realized vol on $NVDA and $AAPL are 9x and 6x, respectively, the same for the SPX. That is unheard of.
Let’s consider another month, Dec’17, when SPX realized vol was 5.5. The two largest stocks in the index were AAPL and $MSFT. What were their respective ratios of realized vol to the SPX in Dec’17? AAPL was 2.7x the SPX. MSFT was 3.6x the SPX.
There are 100’s of blns of $ of market cap “coming and going” in giant names, especially NVDA. A 3T company moving on a 50 vol is not healthy. There’s rampant speculation that is overwhelming the option market’s capacity to absorb gamma risk. The extent to which these meaningful vols on the single stock level do not translate to index vol (NVDA 50, SPX 5), is very unusual and likely not sustainable. Broken record statement: “The very same conditions that cause stocks to become more volatile also cause them to become more correlated at the same time”
Of course, this vol analysis sort of reflects the same thing that everyone already knows: the market is extremely dependent on just a few names. But the gamma risk associated with the dispersion trade may be underappreciated.
National Debt Relief
July 10, 2024
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–I have to start with a story about the yawning gap between asset prices. No, I am not talking about Nasdaq vs Russell, but this example is stark as well. TheRealDeal.com reports that a 41 story office tower in NYC, 180 Maiden Lane, was bought in a short sale for $297m, by Carlo Bellini’s real estate firm 99c. Last trade in 2015 for $470m, partially financed by Blackstone with a $248m loan. Here’s the rich part: it’s 68% occupied, with one anchor tenant being National Debt Relief. At least we can be sure THAT business will remain strong….
(Blackstone’s relationship with Nat’l Debt Relief goes from landlord to client!)
The other story is on BBG: “A penthouse at Aman New York (Crown Building) has sold for $135 million, making it the most expensive home purchased in Manhattan this year.” The five-story unfinished space went for $10k sq/ft. “Priciest deal since 2022”.
https://therealdeal.com/new-york/2024/07/09/carlo-bellini-buys-180-maiden-lane-in-short-sale
–Powell in front of Senate Banking yesterday. He repeated that the Fed needs to see more good data on inflation before cutting. Could it come tomorrow with CPI? Monthly figures expected 0.1% with Core 0.2%. Yoy expected 3.1% from 3.3%. Overall, Powell’s tone was slightly dovish, with emphasis on the slowdown in labor markets; several Senators noted the outsized amount of government hiring in the last payroll data.
–There were several questions/comments about the prohibitive cost of housing, related to high mortgage rates. I thought it would have been appropriate for Powell to mention the rapid increases in insurance and property taxes; if he did, I missed it.
–Semi-annual testimony continues today in front of the House. Ten-year auction as well, which follows a solid 3-yr yesterday. Yields rose a few bps across the curve, with tens +3 to 4.298%. Worth a note is that several of the deferred SOFR calendars are edging to new recent highs. For example, SFRM26/SFRM27 settled -7.5 (9632/9639.5). The past month’s range has been -15.5 to -8.5. SFRM7 is currently the highest point (lowest yield) on the SOFR strip with a yield of 3.605%.
–Several large SOFR option trades yesterday (not covering all, just a few).
New buyer 35k SFRU4 9500/9506.25cs for 0.5 (SFRU4 settled 9487)
New buyer 10k SFRU5 9575/9525p 1×2 vs 9600 and 9599 for 2 bp credit. Settled -1.75 vs 9601.
Exit put buys
+50k 0QU4 9500p for 1.0 (100 bps out of the money with 66 dte).
+30k 2QZ4 9550p for 6.5, covered 9636.5, 15 delta. Underlying SFRZ6 settled 9638.
Powell today
July 9, 2024
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–NFIB Small Business Confidence expected 90.2. The lowest print of the year was in March, at 88.5. That has also been the lowest since 2013; there’s been almost no bounce. From the last report: “Main Street remains pessimistic about the economy for the balance of the year,”
–Powell testifies today in front of Senate Banking Committee at 10:00, tomorrow at the House.
I’m just glad Bob Menendez is still sitting on the committee, because he and I share an interest in the value of gold and maybe he can ask Powell a few questions about it. Of course, Menendez got his gold bars as a bribe… [if there’s anyone in politics who should step down, it’s this guy]
https://www.justice.gov/usao-sdny/pr/us-senator-robert-menendez-his-wife-and-three-new-jersey-businessmen-charged-bribery
–Former Dallas Fed President Kaplan on CNBC yesterday: “I think risk management will dictate a rate cut in September”…but he characterized it as more of game-day decision. In any case, FFV4 settled 9487 or 5.13%, -1 on the day. A Fed cut would bring EFFR to 5.08%, so odds for an ease in Sept are currently around 80%. Rates trading was subdued yesterday, with little net change. Near SOFR contracts were -2 but everything else showed net change of -1.5 to 0, and that includes the treasury curve.
–Three year auction today followed by 10s and 30s Wednesday and Thursday.
–Michigan’s Whitmer appears to have dropped out of the Dem presidential race. Biden’s bravado is buying time to whittle down the potential list of replacements to one or two that the establishment can support. Illinois Governor Pritzker is trying to buy his way onto that list, though his policies have caused residents to flee. “Illinois lost 83839 residents who moved to other states, one of the highest rates in the US, driving a 10th consecutive year of population decline.” Who lost more than Illinois? CA, and Newsom is also running. If either one of these guys wins, the immigration problem will be solved, as they are experts at driving people out of their jurisdictions.
Chicago shootings: At least 103 shot, 19 fatally, in citywide holiday weekend gun violence, CPD says
https://abc7chicago.com/post/chicago-shootings-weekend-least-101-shot-18-fatally/15041696
Soft employment sparks new low in SFRU4/SFRU5
July 8, 2024
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–Though the NFP print was higher than expected at 206k, the unemployment rate ticked up to 4.1% (highest since Nov 2021) and private payrolls were just 136k (only 4 lower prints in past 3.5 years). Average Hourly Earnings yoy were 3.9%. Yields fell, with tens down 7.4 bps to 4.271%. Both twos and fives sank 9.2 bps to 4.597 and 4.216. New high in 5/30 to 25.1 bps (upside breakout). With SFRU4 increasingly constrained as it nears the IMM date (up only 2 bps to 9489) near calendar spreads made new lows. SFRU4/U5 plunged 11.5 bps to a new low of -114.5 (9489/9603.5). U5 jumped 13.5 bps, largest change on the strip. SFRU4/SFRZ4 also made a new low at -34 (9489/9523). FFQ4/FFQ5 settled -122.5 (9469/9591.5)…nearly five eases priced over next year.
–On the SOFR strip, the red/gold pack spread closed at -9.375, the least inverted on a rolling basis since March. I use the old definition, with U5 as the front red contract and U8 as the first gold. Using average prices, the red pack (2nd year) is 9620.875 and the gold pack (5th year) is 9630.25. In a more normal world, that spread is positive…we’re getting there.
–Today brings Consumer Credit for May, expected +$10b. Auctions kick off tomorrow, starting with the 3y, and Powell begins Congressional semi-annual testimony before the Senate Banking Committee. This morning bonds have pulled back a bit, perhaps as a concession to auction supply. Precious metals have likewise eased from strong rallies last week.
Nominal growth below cost of funds
July 7, 2024- Weekly Comment
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Never interfere with an enemy while he’s in the process of destroying himself.
–Napoleon Bonaparte
This quote could apply to many of the plots and subplots swirling around the modern world. The most obvious application is to Biden and the Democratic party, but it has some bearing on the economic landscape as well, with Powell holding rates steady rather than interfering with decelerating economic trends – which are moving in his favor in the fight against inflation.
The latest indication comes from jobs figures. Sure, JOLTs had a small rebound to 8140k, but the trend has been decidedly lower since the peak in February 2022 of 12182k. In Friday’s employment report, Private Payrolls were up only 136k. Since 2021 there have only been 4 months out of 42 with lower Private Payroll prints. Total NFP of 206k included 70k gov’t jobs. Let’s consider gov’t ‘job creation’ over a longer period.
The BLS website says that just a shade under 25% of jobs created in 2023 were government jobs. By examining St Louis Fed data and checking monthly totals, it’s clear that NFP is the sum of private payrolls and gov’t jobs. This year so far, government has accounted for just over 22% of new jobs. However, the birth/death adjustment for private business has overstated private payroll data. I conclude that gov’t payrolls as a percentage of total are even greater than the amounts indicated above. In any case, I am confident that increases in gov’t payrolls don’t directly feed into productivity gains.
[The Fed’s semi-annual report specifically cites strong gains in healthcare and in state and local gov’t hiring. Pg 18 of pdf]
https://www.federalreserve.gov/monetarypolicy/files/20240705_mprfullreport.pdf
Now consider real GDP and annualized inflation figures. CPI comes out on Thursday, expected yoy 3.1% from 3.3% last. GDP Price Index for Q1 was 3.1% (released on June 27) and Q1 GDP was 1.4%. PCE Price Index yoy was released on June 28, and was 2.6%. Taking the highest measure of inflation at 3.3% and adding it to real GDP of 1.4% yields nominal growth of 4.7%. The FF rate is 5.25 to 5.5%. Two-year treasuries yield 4.6%. Cost of funds is now exceeding nominal growth, which likely puts a damper on business expansion plans.
Going forward, the Atlanta Fed’s GDP Now forecast for Q2 is 1.5%. The Blue Chip average, which hasn’t been updated as recently, is 2.0%. The NY Fed’s Nowcast for Q2 is 1.79% (July 5) down from 1.93 at the end of June. If we take the (higher) NY Fed growth estimate and add the CPI projection of 3.1%, then we get 4.9 nominal. The math for new expansion isn’t working out.
Let’s compare recent data with the Fed’s June (SEP) Projections. For 2024, Real GDP in the SEP was estimated at 2.1%. Both Q1 and likely Q2 are lower. Unemployment 4.0%, with Friday printing above that level at 4.1%. PCE inflation 2.6%, last at 2.6%, so right at projection. The year-end 2024 FF projection is 5.1%. FFV4 (which captures the Sept 18 FOMC) settled Friday at 9488, or 5.12%. FFF5 (which covers the Dec 18 FOMC) settled 9520 or 4.8%, essentially forecasting TWO 25 bp cuts by year-end.
Powell appears in front of Congress on July 9 and 10. The actual Monetary Policy Report was released on Friday. I posted the link above, but here it is again with a couple of excerpts:
https://www.federalreserve.gov/monetarypolicy/files/20240705_mprfullreport.pdf
In asset markets, corporate bond spreads narrowed, equity prices rose faster than expected earnings, and residential property prices remained high relative to market rents.
Therefore, measures of market rent growth for new leases can help predict future changes in the PCE price index. Since mid-2022, market rents have decelerated and returned to a growth rate similar to or below their average pre-pandemic pace, while the PCE index continues to show elevated inflation, reflecting the gradual pass-through of market rates to existing tenants. As this process continues, PCE housing services inflation should gradually decline, though much uncertainty remains about the extent and timing.
The report’s Special Section on Housing Services Inflation (page 15) cites alternative shelter price measures including those published by CoreLogic, Zillow, Apartment List and RealPage. All are below the Official PCE Housing Services.
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Friday’s data led to a drop in yields. Tens fell 7.4 bps on the day to 4.271% with 30s down 5.1 bps to 4.467%. Changes on the week were -6.8 bps and -3.3 bps; the largest change on the week was a 12 bp fall in the two-year yield to 4.597%.
This week brings auctions of 3s, 10s and 30s starting Tuesday. ($58b, $39b and $22b). CPI Thursday and PPI Friday.
Below is a chart of SFRU4/SFRU5 one-year calendar. On Friday, this spread made a new low of -114.5 bps (9489 /9603.5). This is not the lowest level for the near 1-year calendar; in May 2023 it was -192!
At the start of this year, the near 1-yr calendar was -146 to -162 (mid-Dec to Jan). At the time, referring in part to the pricing of this spread, analysts were saying the market expected 6 to 7 rate cuts. Even at that time, many traders thought that pricing was far too aggressive, and by April the near 1-yr calendar peaked at -70 to -60 as forward contracts sold off. However, at present, the first calendar is projecting 4 to 5 rate cuts over the period from Sept’24 to Sept’25. On Friday SFRU5 settled 9603.5 or just below 4%, while the Fed’s end-of-2024 FF projection is 4.1%. By the way, SFRZ5 settled 9618, or 3.82%. With economic data slowing, is it possible to see SFRU4/SFRU5 print below -150? Note that in mid-March, SFRU5 was 9634.5. If SFRU4 remains pegged near its current level of 9489, easing prospects may be pushed forward to just after the election, and -150 could easily print.
Last week I wrote this:
Adjusting for new 2 and 5yr notes, I marked 2/10 up 5.1 bps on the week to -37.7 and 5/30 up 4.2 bps to 17.3. If this latter spread closes above 20 a couple of times, the next test will be upper 30’s. Target should be 60 to 70. 58.5 is the 50% retrace from the 2021 high of 163 to the March 2023 low of -46. The double bottom target from 9/2022 and 3/2023 (both lows around -46) is +68 bps.
On Friday I marked 5/30 at 25.1. Feels like a breakout. Any hawkish comment out of Powell and it could slip back down to 20, but it will likely start moving towards the 60-70 bp initial target.
OTHER THOUGHTS
Referring again to the quote at the top of the page, I think the upcoming Democratic Convention, August 19-22 in Chicago, is becoming more important. It’s not surprising that Biden is still insistent that he’s in the race. Whether he knows it or not, he isn’t. However, the distraction is helpful in giving strategists time to shape a united front (wealthy donors) for the new front-runner. There are already major concerns about violent protests which might echo the Dem Convention of 1968, also held in Chicago. Mayhem at this year’s Dem convention would lead to an easy Republican jab: “They can’t even control protests at their own convention, how are they going to run the country?” I wouldn’t be surprised if those visuals aren’t being planned and plotted right now. Note that September treasury options expire 23-August, just after the convention.
SFRU4 options expire 13-Sept. The FOMC is 18-Sept, but it should be fully priced by the 13th. The Kansas City Fed’s Jackson Hole Symposium is August 22-24 (Sept treasury options expire 8/23). Prior to SFRU4 option expiry we get two more payroll reports and two more PCE price releases. Including this week’s there are three CPI reports, the other two being 8/14 and 9/11. The July FOMC is 31-July. The election is Nov 5, followed by another FOMC announcement on Nov 7. I believe the Fed will ease in September, and pricing will lean towards better than 50/50 for another in November. If so the 9500 strike could play. SFRU4 9500c traded and settled 3.0 on Friday ref 9489.
Payroll Friday (when no one is actually working given the 4th holiday)
July 5, 2024
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–Yields fell Wednesday in the wake of a weak ISM Services number. On Monday ISM Mfg was 48.5 and Wednesday the Service side was 48.8 (expected 52.5). Both are now in contraction territory, with the Service Employment number at just 46.1. Goods inflation has already been moderating, it looks like services might follow suit. Today is the Payroll data, with NFP expected 190k. Get ready for the Unemp Rate to tick over 4%; the last time it was 4.1% was in November of 2021.
–On Wednesday 10’s fell nearly 9 bps to 4.345%. On the SOFR strip greens, blues and golds (3rd, 4th and 5th years forward) were +10 to +10.5 with prices clustered around 9630 or 3.7%. Forward expectations of rates appear quite comfortable around 3.5 to 3.75% for the time being. Of course, the large recent 100 bp wide call spread being accumulated for around 4.5 bps is SFRH5 9675/9775cs which settled Friday at 4.75 ref H5 9545.5 (Lower strike is just 3.25%). This trade would perform best in an environment of rapid easing (seen in 2001 and 2008). Interestingly, there is now also buying of 100 bp wide PUT spreads. On Wednesday, a new buyer of 30k SFRZ5 9562.5/9462.5 ps for 26.75 to 27; settled 24.75 vs Z5 9605. In the Fed’s latest dot-plot the 2025 FF projection was 4.1 or a price of 9590. If the Fed’s right, then this put spd expires worthless. Of course, the put spread works best if the Fed NEVER eases. Just as a point of comparison, the contract in front, SFRU5 settled 9590, and the same strikes ps settled 26.5. So curve roll-down is pretty much like paddling in place over the near term.
–October FF, which provides a decent guidepost for easing expectations at the September FOMC, settled 9487 or 5.13%, up 1.5 on the day. Current EFFR is 5.33% or 9467 so an ease would take it to 5.08% or 9492. Therefore current ease expectations are around 80%.
