Forward Restraint
March 20, 2024
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–What’s the problem? The problem is that service inflation is not coming down; we think goods inflation is probably under control. The three elements of financial conditions that have become easier are 1) equity prices are frothy 2) credit spreads are tight 3) long rates are relatively low. Service inflation would likely decelerate and employment, which is already edging slowly higher, would likely respond in our favor if we could reverse the stimulative effects of the loosest aspects of financial conditions.
–We already are debating the end to QE for technical reasons. There is a risk that both equities and bonds might embrace reduced QE as a reason to run higher. However, the already restrictive stance in the current FF target likely warrants some easing, as was forecast in the last SEP. The deleterious effects of a weaker yuan and recession in Europe might be accentuated by a signal that we no longer intend to ease in 2024. The lower end of the income population is already straining under high short-term funding rates.
–How can we officially signal a monetary posture to support our goals? Rather than flip-flop on our near term FF projection, let’s move the 2025 and 2026 projections higher. That will counteract QE trimming and will discount forward cash flows, taking stocks lower and bond yields higher.
In December, the FF projection went from 5.1 to 4.6 in 2024, 3.9 to 3.6 in 2025, and remained steady at 2.9 in 2026. I would recommend leaving 2024 at 4.6, but push 2025 back up to 3.9 and notch 2026 up to 3.1. The front end of the SOFR curve is already fairly priced with the current 2024 projection, but forward rates would likely achieve tighter financial conditions which will support deceleration in Service inflation.
BOJ ends negative yields. TYJ put position adjustment
March 19, 2024
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–As had been consistently telegraphed, the BOJ ended negative rates, and YCC, and ended purchases of ETFs and REITS. Currently $/yen is near its recent high, well above 150.
–Yesterday yields rose across the board, with tens +3.6 bps to 4.338%. On the SOFR strip reds thru golds were down 3.0 to 4.5. New highs in a few of the near calendars: while SFRM4/SFRM5 remains the most inverted 1-yr calendar, it rose 1.5 to a new high of exactly -100 (9483.5/9583.5). The near 3-month calendars are all right around one-qtr pct: M4/U4 -26.5, U4/Z4 -28, Z4/H5 -25, H5/M5 -20.5. Suggests a smooth, continuous flight path of easing. Like Boeing stock.
–Crude remained bid with a late price on CLK4 82.28 (+1.70). On this particular contract, CLK4, the high last September was 84.87. The front contract high at that time was just over 95. Bitcoin is undergoing significant long liquidation.
–Of note: while all yields are around new highs for the year, the ‘real’ ten-year inflation-indexed note yield edged back up above 2% ending at 2.015%. The 5y tip is 1.95%. These are restrictive levels.
–Large position adjustment in TYJ puts as yields edged to new recent highs. On balance, it appears as if a long TYJ 110.5/109.5 ps was replaced with long 109.75/108.75p 1×2, which settled 14 (24 and 5). Summary below. April options expire Friday.
–Housing Starts and $13b 20y treasury auction today (re-opening).
TYJ 109.5/108.5ps cov 109-28, 27d, 21k at 13
TYJ 110.5/109.5/108.75p fly 1x2x2 cov 109-22, 30k, -36k at 31
TYJ 109.75/109.50ps cov 109-30, 9d 6 paid 50k
Dec and Dots
March 18, 2024
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–Several near SOFR contracts made new lows on Friday, and treasury yields are at or close to new highs for this calendar year. Tens ended at 4.302%, up about 1 bp; high of the year has been 4.323%. Fives ended at 4.323%, high in Feb is 4.329%. SFRZ4 posted a new low settle for the year at 9540.5 (down 2.5 on the day). Last October’s low settle was 9519.5, of course at that time the contract was 14 months forward as opposed to 9 currently. I highlight December simply because that contract has the most relevance with respect to Wednesday’s dot plot.
–The surprise at the December FOMC was that the 2024 estimate for FF was moved down to 4.6% from 5.1 in Sept. As a price, that’s 9540, exactly where Z4 is currently. Some are expecting one of those three eases to be withdrawn on Wednesday. Perhaps of equal interest is the end-of-year 2025 projection for FFs. The December estimate was 3.6 which had been reduced from 3.9 in Sept. In futures terms, 3.6 is 9640, or 100 lower than the Dec’24 estimate. However, the Z4/Z5 calendar settled -72.5 (9540.5/9613.0), about 1/4% away from the dot plot of -100. A strong signal of ‘higher for longer’ would be a bump back up to 3.9 for 2025, which would also perfectly sync with the current SFRZ5 price.
–There were a few 10-15k blocks which went through on Friday which sort of target 4% for 2025:
SFRM5 9637.5/9587.5/9537.5 put fly 9.5 paid 17.5k
SFRU5 9675/9600/9525 p fly 17.5 paid 7k
SFRZ5 9675/9600/9525 p fly 15.5 paid 9k
The latter two have 9600 as middle (target) strike, which is 4%. Not that these will be held to maturity, but the implication is that these red contracts become less volatile and gravitate around current levels.
–BOJ expected to end negative rates and perhaps lift the yield cap on JGBs tomorrow. FOMC announcement Wednesday. 20-year auction tomorrow.
Gresham’s Law
March 17, 2024 – Weekly Comment
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The crosscurrents, dislocations and uncertainties in the present situation point up one uncomfortable but inescapable fact: we are dealing with a situation marked by gross imbalances that can neither be sustained indefinitely nor dealt with successfully by monetary policy alone, however it is conducted.
We are borrowing as a nation far more than we are willing to save internally.
We are buying abroad much more than we are able to sell.
We reconcile borrowing more than we sell by piling up debts abroad in amounts unparalleled in our history.
Seems like a quote from one of today’s financial blogs. But it’s Paul Volcker from 1985. The issues never change. It’s only where we are on the spectrum.
What it boils down to is confidence. Trust in national institutions that safeguard justice and monetary integrity. Integrity with respect to the store of wealth and medium of exchange.
It relates to Gresham’s Law: “Bad money drives good money out of circulation.” In my mind, the rallies in gold and bitcoin are a reflection of this phenomenon. I googled Gresham’s Law and bitcoin as I was thinking about this, and unsurprisingly there was already an article about it, by a person (again unsurprisingly) named “Sheepy” on Linked-In. “…more established cryptos like Bitcoin or Ethereum might be considered ‘good money’ due to their wider acceptance and relative stability. In contrast, lesser known or more volatile cryptos might be ‘bad money’… The way gov’ts and financial institutions approach crypto can also affect the perception of good and bad money.”
A real-time example is afforded by El Salvador’s President Nayib Bukele, who is transferring a “big chunk” of its bitcoin assets to an offline physical vault. Hold your good assets out of circulation.
The period before the 1896 Democratic National Convention (which was held in Chicago, as will be the next one on Aug 19-22, which ought to be a doozy) was dominated by attacks on the gold standard by opponents who wanted bimetallism, re-introducing silver as legal tender. From Wikipedia:
This would inflate the money supply, and, adherents argued, increase the nation’s prosperity. Critics contended that the inflation which would follow the introduction of such a policy would harm workers, whose wages would not rise as fast as prices would, and the operation of Gresham’s law would drive gold from circulation, effectively placing the United States on a silver standard.
Sound familiar? The huge Covid increase in fiscal transfers and M2 sparked inflation. As Powell frequently reminds us, inflation hurts the lower income end of the population most as wages lag.
The 1896 convention was famous due to William Jennings Bryan’s Cross of Gold speech. I include this excerpt as it strikes me in its relevance for today:
There are two ideas of government. There are those who believe that, if you will only legislate to make the well-to-do prosperous, their prosperity will leak through on those below. The Democratic idea, however, has been that if you legislate to make the masses prosperous, their prosperity will find its way up through every class which rests upon them. You come to us and tell us that the great cities are in favor of the gold standard; we reply that the great cities rest upon our broad and fertile prairies. Burn down your cities and leave our farms, and your cities will spring up again as if by magic; but destroy our farms and the grass will grow in the streets of every city in the country.
In my mind, the “farms” of the 1800’s can be equated to domestic productive capacity and enterprise. Capital deployed to enhance productivity raises the nation’s standard of living; it benefits the “masses”. Anyone can see the decay of big cities.
In the Roman Empire it was Diocletian in 301 A.D. who fixed prices because of debilitating inflation, caused by debasement of the currency. A Mises Institute article notes that in the time between Nero and Diocletian, “the denarius (standard silver coin) had been reduced to one-tenth of its former value.” The vast ’Price Setting Edict’ failed of course and was repealed in 307. Nixon echoed the strategy in 1970.
The Fed is trying to get us back to where the purchasing power of the currency is officially devalued by just 2% a year. However, the Fed’s efforts are being thwarted by Fed’l Gov’t spending. One quarter of last year’s job growth was government. A recent tweet by EJ Antoni notes that “Over 52% of fed’l gov’t spending in Feb was financed by debt.” The White House press release announcing Biden’s 2025 Budget blares that it “Advances Gender Equity and Equality”. A budget blog notes, “…the level of borrowing under the President’s budget would be unprecedented outside a war or national emergency.” Is gender equity a crisis? The blog continues, “…spending would rise from 22.7% of GDP in FY 2023 to 24.6% in 2024 and 24.8% in 2025. …Revenue which fell to 16.5% of GDP in 2023, would rise to 18% of GDP in 2024 and grow to 20.3% of GDP by 2034.” When Gov’t spending is 25% of GDP, but tax revenue is only 16.4% of GDP (long term average 17%) there’s a problem. Ken Rogoff noted this weekend that “Washington has a very relaxed attitude toward debt that I think they’re going to be sorry about.”
All of this brings us to the topic of US treasury yields, especially at the long end. Vol is not screaming. Credit spreads are tight. But inflationary signals are tipping slightly higher. Oil and copper are at new highs for 2024. Good assets are being accumulated (gold, bitcoin) relative to treasuries. Not that treasuries are ’bad money’ but the architecture underlying their value is obviously being eroded.
The BOJ and FOMC meetings this week aren’t likely to improve sentiment for longer maturity bonds. Ten-year JGBs ended the week at a high for 2024 at 77.8 bps. Last year’s high was just over 95 bps. Wage increases in Japan make it likely the BOJ announces a hike March 19. Near SOFR contracts are at new lows for the year, having significantly repriced easing over the next year or so. For example, SFRZ4 settled at a high of 9639.5 in January (3.605%) but was almost exactly 100 bps lower just two months later with Friday’s settle at 9540.5 (4.595%). That yield is almost exactly 75 bps lower than the current Fed Effective of 5.33%, synching with the last dot plot which indicated three cuts. There are some that think Fed members may trim back their assessments of appropriate cuts for this year to bring the median to two but I personally don’t see much of a chance of that. Indeed, there has been heavy trade in SOFR options suggesting increased confidence for 2-3 eases. SFRZ4 9537.5 straddle settled 68.5 on Friday. The previous week, the Z4 atm 9562.5^ settled 76.5. With SFRZ4 settling at 9540.5, the 9500p settled 16.25 with 31 delta. The 9600c settled 18.0 with a 28d. SVB failed just one year ago; the market is still sensitive to potential issues that could cause emergency easing. Calls are bid vs puts.
However, what is perhaps more likely than a repeat of last March, is a repeat of the following period. From last May to October the 10y yield soared from 3.4% to 5%. That yield increase led many to say that tightening financial conditions were doing the Fed’s job.
From October to December the 10y yield plunged from 5% to 3.8%. Since then it has been generally rising, though at a much slower pace than last summer’s increase. The 50% retrace of Q4’s move is 4.39% and 61.8% is 4.53%. I can envision a scenario where the Fed remains fairly neutral pre-election, but long end yields adjust higher with a tipping point realization that debt levels are out of control. A deterioration in employment data might not do anything to stop a rise in longer end yields. Ironically, Fed easing could accentuate negative sentiment toward bonds. The odds of such a scenario playing out may not be high, but I believe they are increasing. If so, the attached chart points up an opportunity.
The chart is the 30-year bond yield with 3-month vol on the US contract overlaid. The ten year looks much the same, but I highlight longer maturities as we go into the 20-year auction on Tuesday. Vol is back where it was on the SVB unwind, having continually compressed in the aftermath of October’s yield surge. However, yields are moving higher. OTM puts might be considered relatively cheap.
| 3/8/2024 | 3/15/2024 | chg | ||
| UST 2Y | 448.4 | 472.1 | 23.7 | |
| UST 5Y | 406.1 | 432.3 | 26.2 | |
| UST 10Y | 408.7 | 430.2 | 21.5 | |
| UST 30Y | 426.2 | 442.6 | 16.4 | |
| GERM 2Y | 275.9 | 294.6 | 18.7 | |
| GERM 10Y | 226.7 | 244.2 | 17.5 | |
| JPN 20Y | 149.5 | 154.8 | 5.3 | |
| CHINA 10Y | 229.3 | 234.7 | 5.4 | |
| SOFR M4/M5 | -125.5 | -101.5 | 24.0 | |
| SOFR M5/M6 | -35.0 | -36.5 | -1.5 | |
| SOFR M6/M7 | 1.0 | -6.5 | -7.5 | |
| EUR | 109.41 | 108.90 | -0.51 | |
| CRUDE (CLK4) | 77.50 | 80.58 | 3.08 | |
| SPX | 5123.69 | 5117.09 | -6.60 | -0.1% |
| VIX | 14.74 | 14.41 | -0.33 | |
https://fraser.stlouisfed.org/title/federal-reserve-bulletin-62/september-1985-20761/fulltext
https://www.linkedin.com/pulse/good-money-bad-deciphering-greshams-law-era-cryptocurrency-2zjze/
https://www.crfb.org/blogs/overview-presidents-fy-2025-budget
OpEx on the Ides of March; hang on to your toga
March 15, 2024
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–Hard sell off in treasuries, as PPI came in hotter than expected, 0.6 vs 0.3 m/m and 1.6 vs expected 1.2 y/y. Fives and tens ended at the same yield of 4.294% which was +10.9 bps in 5y and +10.4 in 10y.
–New highs in some of the near one-yr SOFR calendars. SFRM4/M5 is the most inverted at -105, but it rose 10 on the day as M4 was -2 at 9486.5 while M5 was -12 at 9591.5. Of note, SFRU4/U5 jumped 9.5 to -94.0, highest that spread has settled in a month. Notable because this is the one Bill Gross had cited as a long. Greens (3rd year forward) were weakest on the strip at -14.875.
–Retail Sales printed weaker than expected, but inflation is the dominant factor. As mentioned yesterday Crude Oil remains bid, adding to Wednesday’s gains with CLK4 settling 80.74, +1.44; highest settle in this particular contract since October. Recall, mid-October is when yields made their highs last year. Of course, the front contract at that time, in late September, had reached 93.68. May Copper also held gains from Wednesday.
–Implied vol slightly better bid in treasuries with TYM4 settling 110-06+, -23+. April puts have over 1 million in open interest relative to 4.3m in the outright future. Largest strikes, 110.5 with 78k open (0’37s, -0.62d), 110.0 with 86k open (0’21s, -0.42d) and peak OI 109.5p with 133k (0’11s, -0.25d). April options expire next Friday, covering BOJ and FOMC. The 109.5 strike should equate to around 4.39%.
–Big quarterly expiration day in stocks. MSFT new all-time high yesterday, while TSLA closed 162.5 after being near 300 in July, and AAPL closed 173 from near 200 in December. Bitcoin continues a 2-day pullback this morning printing 68k. AMZN near ath, but META and NVDA look like potential tops.
–Today’s news includes Empire Mfg, expected -7.0. Import and Export prices. Industrial Production expected 0.0 from 0.1. Then Michigan Sentiment and Inflation surveys.
Keep an eye on Oil and Copper
March 14, 2024
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–Solid 30y auction at 2.375%. USM4 contract immediately popped from 120-07 to 120-20, but then slid back down to its starting point (120-08s). Ten year yield finished +3.4 on the day at 4.18%.
–A lot of Wednesday puts on TY expired worthless yesterday, but shorts are being replaced with TYJ puts (22-March expiry). TYM4 settled 110-30. Buyer of about 40k TYJ4 110.5/109.25 ps for 13 to 14 covered 110-31+ to 111-01. The put spread settled 15 ref 110-30. Put buying in TY has been pretty relentless for the past couple of weeks.
–A couple of large downside SOFR trades: SFRM4 9487.5/9475ps 5.5 paid 16k covered 9489, 25d. Settled 5.5 vs 9488.5s. Also new buyer of 50k SFRH5 9600/9550/9500 p fly for 10.5 to 11.0. I marked settles 58.5/32.25/16.75 so 10.75 vs 9578.0. Going into next week’s FOMC, April Fed Funds (FFJ4) are right on top of EFFR (5.33) at 9467.5. One year forward FFJ5 is 9577.5 or 4.225%, 110 bps lower. In general, the market appears comfortable with the idea of four rate cuts over a year.
–Worth noting strength in economically sensitive prices: CLK4 this morning is at a new high for the year at 79.91 (+0.61). Copper is also at a new high for this calendar year, with HGK4 printing 4.08 this morning. A few sessions ago on March 6 it was 3.83. Apparently inventories are quite low, as they are across a lot of economically sensitive materials. Nice jump in open interest on HG’s rally yesterday (thanks TD).
–Today’s news includes PPI expected +1.1 yoy from 0.9. Core 1.9% from 2.0. Retail Sales is the more important report, expected +0.8% m/m. Jobless Claims expected 218k.
No help from CPI; wage gains in Japan clear the way for BOJ hike
March 13, 2024
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–CPI higher than expected yesterday, pushing yields up. Headline 3.2 and Core 3.8 yoy, both 0.1 hotter than forecast.
From Michael Ashton @inflation_guy
Now, the story starts to become a little clearer, albeit concerning. Core services rose to 5.4% y/y from 5.2% y/y, while core goods was unchanged as I noted above. Rents are coming down, but outside of rents we are seeing some stabilization at higher-than-pre-COVID levels.
…With this, and with Core Services ex-shelter (“Supercore”) at +0.47% m/m – which means supercore accelerated to +4.3% y/y – it is inconceivable that the Fed will yet consider cutting rates. It is possible that they may later in the year, but there is far too much exuberance in the bond market about that prospect.
Tens rose 5.3 bps to 4.153%. Twos up 6.3 to 4.595%. 2/10 only 1 bp above its recent low of -45.2. On the SOFR strip reds down 9 bps, greens down 7.25. This spread is right at its recent low, just above -33. Ten-year re-opening was 4.152% at cut-off but actual result was 1 bp through at 4.162%. Thirty year auction today.
–Implied vol was hammered across the curve. For example, SFRH5 9587.5^ settled 95.75 on Tuesday, and 93.25 yesterday. (Futures from 9591.5 to 9582.5). TYJ4 111.5^ was 1’10 Monday vs 111-19; yesterday TYJ4 111.25^ settled 0’61 vs 111-055. Of course, April options expire just one week from Friday, but the market perceived CPI as the big event of the week. Late seller (adding) to TYK4 109.5/113 strangle, -12k at 0’44, settled 0’46.
–There is still considerable expectation for ease reflected in near FF contracts. July (FFN4) settled 9486.5 or 5.135 bps vs current EFFR of 5.33. Assuming next week’s FOMC is dead, this contract captures May 1 and June 12.
–From the Japan Times regarding wage negotiations (clearing the way for a BOJ hike):
This year’s annual negotiations, known as shuntō, conclude this month and are being monitored especially closely by policymakers, as developments could be a decisive factor in the Bank of Japan’s decision on whether to adjust its ultraloose monetary policy next week or next month.
Toyota, Japan’s largest automaker, has fully accepted workers’ demands and offered its largest wage hike since 1999. The carmaker’s labor union had demanded a hike of between ¥7,940 ($54) and ¥28,440 for monthly wages depending on job type and position. Toyota will also raise salaries for new employees.
–It’s plausible that a hike next week by Japan could undermine support for long US treasuries, thus tightening financial conditions.
–Interesting post re: US Gov’t spending by EJ Antoni
Over 52% of federal gov’t spending in Feb was financed by debt – MORE THAN HALF:
Place your inflation bets
March 12, 2024
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–CPI is the big event today, expected 0.4 from 0.3 m/m, with Core 0.3 from 0.4. Year/year expected 3.1, same as last, with Core 3.7 from 3.9. Curve flattened yesterday with 2s up 4.8 bps to 4.532% and tens up 1.3 to 4.10%. The three year auction went well, going off at 4.256% vs 4.277 at the cut-off. Tens today and thirties tomorrow.
–There continues to be heavy buying of high-gamma weekly 10y puts. Yesterday it was mostly in TY week-3 (this Friday). Early buyer of 40k TY week3 110.75/110.25ps for 5, covered 111-15, 5d. Settled 5 (8 / 3) vs 111-19. Late there was a buyer in clips totaling 40k 111.0/110.75 put spd for 4, covered against 19.5 to 20.5, 6d. Settled 4 (12 / 8). TYM4 settled 111-19. Total OI in week-3 puts up 108k. It wasn’t uncommon to see some high gamma put buys before big economic releases, but recent activity is taking it up a notch. Feels like more than just short-term protection for a bond portfolio. In any case, 0-dte (or close to it) is making the leap from stocks to bonds. On a day when open interest fell in almost all other treasury futures, TY was up 30k.
–Kevin Muir (MacroTourist) notes that the inflation swap curve is raising forward inflation expectations. However, the ten year breakeven is well behaved, at 2.273 on yesterday’s mark at futures settle (range of 2.34 to 2.24 over the past month). Elevated shipping costs and crude oil/gasoline prices are likely keeping inflation in focus. However, retail sales are out on Thursday and may show waning consumer enthusiasm.
No auction concession, yet
March 11, 2024
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–Japan revised an initial negative print for GDP (last three months of the year), to positive 0.4%, providing cover to end negative rates and YCC. Ten year JGB prints a new high for this calendar year at 75.5 bps and $/yen is pressing lower, now at 146.60. The 200 dma is 146.22; we’ve been above that moving average since early Jan, but it now appears that 145 is a target. BOJ is March 18/19. Last year’s JGB high was nearly 1% in October.
–Three-yr treasury auction today, followed by 10s and 30s Tuesday and Wednesday. CPI is tomorrow. Headline yoy expected 3.1% from 3.1 last. Core expected 3.7% from 3.9. Friday’s employment report featured higher than expected NFP at 275k, but revisions and other aspects of the report were soft. Yields were mixed, with 2s down 2.8 bps to 4.484% but tens nearly unch’d at 4.087%. As mentioned in yesterday’s note, TY puts expiring this Wednesday, March 13, were heavily traded (bought). Open interest just on Wednesday puts rose 76k. TY wk2 Wed 110.75 puts settled 4 adding 21.4k in open interest. The 111p traded 62k in volume and settled 7, adding 6.6k in open interest. Futures settled 111-23+. Current print is 111-25+.
–Bitcoin has exploded to a new high of 71700. Can crypto strength spark renewed buying in Nasdaq after the huge reversal in NVDA on Friday?
Auctions and CPI
March 10, 2024 – Weekly Comment
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The Fed’s Z.1 quarterly report was released last week for Q4. While the data is perhaps a bit stale, the debt levels are still somewhat eye-opening. Total Household Debt ended 2018 at $15.582 trillion. By the end of last year it had grown to $19.955T, an increase of 28% over five years. Total business debt grew at a similar rate, from $16.151T in 2018 to $21.126 in 2023, or 31%. Surprisingly, on the Gov’t side, State and Local Gov’t debt was $3.124T at the end of 2018, and rose to just $3.255 in 2023, an increase of just 4%! (Did they even have Chicago in there?) But Federal Gov’t Debt over that time period grew 65% from $17.865t to $29.472T. The one-year increase from 2022 to 2023 was $2.621T. In one year Fed’l Gov’t Debt rose almost as much as total State & Local debt. That deficit spending is what is driving economic “growth”.
Yields ended a bit lower last week, with twos down 4.5 bps to 4.484% and tens down 9.1 to 4.087%. Powell repeated that the Fed needs more confidence that inflation is trending to target before easing. The employment report featured a strong headline NFP gain of 275k, but the previous number was revised lower by 124k, the unemployment rate ticked up to 3.9% and average hourly earnings were up only 0.1% month/month. Overall, a moderately weak report.
This week brings auctions of 3-yr notes on Monday ($56b), 10-yr notes on Tuesday ($39b) and 30s on Wednesday ($22b). CPI is released on Tuesday, expected 0.4% m/m with Core 0.3%. Yoy expected 3.1% from 3.1% last and Core 3.7% from 3.9% last. Energy prices firmed over the month of February. On Thursday, PPI and Retail Sales are released.
The FOMC meeting is one week from Wednesday. The BOJ meeting is March 18/19. $/yen had a significant move on the week, falling from 150.12 to 147.06 as an end to negative rates is being considered. From Reuters:
A growing number of Bank of Japan policymakers are warming to the idea of ending negative interest rates this month on expectations of hefty pay hikes in this year’s annual wage negotiations, four sources familiar with its thinking said.
Many BOJ policymakers are closely watching the outcome of big firms’ annual wage negotiations with unions on March 13, and the first survey results to be released by labour umbrella Rengo on March 15, to determine how soon to phase out their massive stimulus.
A shift in BOJ policy could reverberate throughout global markets, strengthening the yen further, making yen carry trades less attractive. While US and European yields were lower on the week, the 10y JGP ended at 73 bps, near the high of this calendar year (up 2 bps on the week).
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A large amount of Wednesday (March 13 expiry) treasury options traded Friday, weighted heavily toward puts. About 9.8k calls traded, but put volume was over 220k with open interest increasing 76.7k. The 30yr auction is Wednesday (3s and 10s Monday and Tuesday) so all auctions are captured. CPI is Tuesday. It’s a bit hard to see on the CME volume and open interest site, but Wednesday week-2 110.75 puts settled 4, and added 21.4k in open interest. The 111p traded 62k in volume and settled 7, adding 6.6k in open interest. Underlying TYM4 settled 111-23+.
April puts on TY expire on 22-March, just after the FOMC. Put open interest is 1.045 million, with the peak strike being the 109.5p at 129k, settled 3/64. TYJ4 call OI is just 575k.
Does it matter? My sense is that the market’s underlying concern is higher long end yields. Whether these put trades are sparked by fears of inflation due to energy cost spikes, or shipping and other supply chain issues, or just massive bond supply, a ten-year yield nearing 4% requires upside yield protection.
A friend asked where I thought TY Wed 111p would be on CPI if futures printed exactly 111-00. I would imagine the straddle would still be about 7-9 bps given unknown results for 10 & 30 auctions, and figure the puts would be about 15/17.
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I have to mention NVDA which posted a huge key reversal Friday (new high, outside range, massive volume, closed near the bottom of the range). Volume was over 114 million shares. There have only been three other days in the past year with larger volume: Aug 24 with 115m, closing price 471.63, and May 25, with 154 million volume and a close of 379.80 (both coinciding to earnings reports). On a $2 trillion market cap the range of 974 to 865 represented a swing of over $200 billion.
Technical markers like key reversals haven’t been all that valuable recently in terms of identifying trend changes. For example, March Bitcoin futures had a huge 10k outside range day on Tuesday, 60120 to 70195. Big volume, and price settled in the bottom quarter of the range. Classis reversal. However, on Friday BTCH4 made a new contract high 71055.
My bet is that NVDA will see further weakness going into Friday’s option expiration, which will likely take Nasdaq along for the ride.
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I don’t follow tax refunds closely. However, it’s worth noting that the average refund amount, as of Feb 16, 2024, was $3207 vs $3140 in 2023. That’s an increase of just $67 or 2.1%. Relative to CPI of 3.4% at the end of 2023, this data suggests that aggregate wage increases aren’t keeping pace with inflation. Likely due to calendar quirks, the total amount refunded so far is $66.9 billion vs $87.2 billion last year. Hey Krugman, tell me again why the average consumer should be thrilled with Bidenomics. A podcast by Grant’s noted that auto insurance has increased by about 20% over the past year, partially due to the fact that social inflation has been staggeringly large, contributing to outsized jumps in insurance costs. [Social inflation is related to large jumps in jury awards] Your government at work?
From the IRS as of Feb 16, 2024. First column is 2022, middle is 2023, followed by percentage change
| 3/1/2024 | 3/8/2024 | chg | ||
| UST 2Y | 452.9 | 448.4 | -4.5 | |
| UST 5Y | 415.7 | 406.1 | -9.6 | |
| UST 10Y | 417.8 | 408.7 | -9.1 | wi 409.0/08.5 |
| UST 30Y | 432.7 | 426.0 | -6.7 | wi 426.5/26.0 |
| GERM 2Y | 289.0 | 275.9 | -13.1 | |
| GERM 10Y | 241.3 | 226.7 | -14.6 | |
| JPN 20Y | 144.3 | 149.5 | 5.2 | |
| CHINA 10Y | 238.3 | 229.3 | -9.0 | |
| SOFR H4/H5 | -119.0 | -126.3 | -7.3 | |
| SOFR H5/H6 | -54.0 | -58.5 | -4.5 | |
| SOFR H6/H7 | -0.5 | -1.5 | -1.0 | |
| EUR | 108.41 | 109.41 | 1.00 | |
| CRUDE (CLJ4) | 79.97 | 78.01 | -1.96 | |
| SPX | 5137.08 | 5123.69 | -13.39 | -0.3% |
| VIX | 13.11 | 14.74 | 1.63 | |
