Curve flatter on minutes
January 4, 2023
****************
–SOFR curve flattened, partially in response to FOMC minutes. SFRM4, the weakest contract, -4 at 9538, SFRM5 +2 at 9669.5, SFRM6 +3.5 at 9683.0 and M7 +3.5 at 9676.0. Again, note that all contracts from June’25 to June’27 are within a 15 bp range, 9669.5 to 9685. (Consistent with terminal range 3.0 to 3.25%)
–From the minutes: “Sev’l observed that circumstances might warrant keeping the target range at its current value for longer than they currently anticipated. …Sev’l noted the risk that, if labor demand were to weaken substantially further, the labor market could transition quickly from a gradual easing to a more abrupt downshift in conditions. …All members affirmed their strong commitment to returning inflation to their 2 pct objective.” So that’s, “on the one hand, on the other hand”
–SFRM4/M5 posted a new low at -131.5. SFRH4/H5 is the most inverted spread, now at -153.5. The last hike was in July 2023. About the longest period between last hike to first ease is 9 months. Equities remain pressured with Nasdaq Comp down another 1.2%
–There was some discussion about the lower usage of the Reverse Repo facility (money mkts had shifted to higher yielding bills and private-mkt repo). This discussion is related to the ample (or large excess) reserves regime. The excerpt below indicates, to me anyway, that balance sheet run-off is going to end soon. Emphasis added. Details will likely be forthcoming at the Jan 31 FOMC.
Several participants noted that, amid the ongoing balance sheet normalization, there had been a further decline over the intermeeting period in use of the ON RRP facility and that this reduced usage largely reflected portfolio shifts by money market mutual funds toward higher-yielding investments, including Treasury bills and private-market repo. Several participants remarked that the Committee’s balance sheet plans indicated that it would slow and then stop the decline in the size of the balance sheet when reserve balances are somewhat above the level judged consistent with ample reserves. These participants suggested that it would be appropriate for the Committee to begin to discuss the technical factors that would guide a decision to slow the pace of runoff well before such a decision was reached in order to provide appropriate advance notice to the public.
–Today’s news includes ADP expected 110-115k. Jobless Claims expected 220-225k. S&P Composite PMI 51.0.
Rebalance
January 3, 2024
*****************
–Yields rose on the first trading day of the year, with tens up 6.3 bps to 3.943%. On the SOFR strip, the red pack led the way, settling -11.625 at 96.685, a yield of 3.315%. Stocks were hit as AAPL tumbled 3.7% (a friend noted rebalancing as AAPL had become an outsized proportion of portfolios; Barclay’s downgraded AAPL). SPX -0.57%, Russell -0.72% and Nasdaq Comp -1.6%.
–Large put condor buy as a lean against ease pricing: +40k SFRJ4 9537.5/9525.0/9500/9462.5 broken p condor for 2.25. Settled 1.75 ref 9542.0 in SFRM4. The put tree (9537.5/9525/9500) settled 0.25, but the lower strike bought for protection “just in case” the Fed’s not done.
–Today’s news includes ISM Mfg, expected 47.1 from 46.7. JOLTS exp 8.85m vs 8.75m last. Fed minutes this afternoon. No “push-back on market pricing” discussion?
–From Reuters this morning:
Jan 3 (Reuters) – Some of China’s top banks have sharpened scrutiny of smaller peers’ asset quality and have tightened standards for interbank lending, three sources said, in an effort to curb credit risk as a deepening property debt crisis ripples through the economy.
I’m sure that China’s property woes dwarf those of the US, but CRE problems continue to lurk on regional bank balance sheets. On the other hand, US Gov’t Debt just exceeded $34 trillion. Like everything else, the tacit decision is to surreptitiously transfer problems to the US gov’t balance sheet; then just spend out of it. Eventually it’s a binary outcome, massive depression or inflation.
From friends at RJO London regarding SPX end-of-2024 targets (thanks NL and QB )
FWIW, last year’s average guesstimate was 4000 (ended 4770)!
Oppenheimer 5200
Goldman 5100
Deutsche Bank 5100
Citi 5100
BMO 5100
RBC 5000
BofA 5000
UBS 4850
Barclays 4800
Evercore 4750
SocGen 4750
Wells Fargo 4625
M Stanley 4500
Cantor 4400
JPMorgan 4200
Taking a lap
December 31, 2023 -Weekly comment
****************************************
Another turn of the calendar. I was trying to come up with some sort of analogy and I kept coming back to memories of the old Eurodollar pit at 30 South Wacker. This was a huge complex, a large rectangular center jammed with locals and order-filling brokers and clerks, the option pit on the north end and the back months from reds forward tiered up on the opposite south end. Probably 250-275 feet in length. There were aisles around the perimeter, with trade checkers and runners going back and forth. On either side booths stacked up like a stadium, where desk brokers took phone orders from around the globe. I don’t even know how many people worked in the Eurodollar quadrant at its peak, maybe 1000? It’s not for everyone, but I loved that atmosphere.
This image is from the option pit looking south.
So what’s that got to do with the earth’s orbit around the sun? Not pictured in the image above is FO, a large filling broker in the option pit who had a menagerie of clerks and runners on his payroll, one of which was Frankie [Dion?] a wiry, scrawny kid from the south side with a shock of curly black hair and a big gap-toothed smile. I have no idea how he landed on the CME floor, he was the type who was in a million scrapes as a kid in the neighborhood, and thought everything was pretty funny, even the stories of when he got his own ass kicked. Anyway – and I think it was MRPH who instigated this – Frankie and his brother Spaz would have enthusiastic races around the pit, with requisite wagering among the spectators. (Yeah, ‘Spaz’. I sort of doubt it was his given Christian name though). As it relates to the trading year just passed, a lap around the pit came with many obstacles: people wandering around, floor security guards. I’m pretty sure some of these races also featured unraveling rolls of toilet paper on the runners, but that may well have been another stunt (apropos to 2023). Anyway, this year’s race has been run, the money has changed hands. Sadly, it’s just not quite as much fun anymore.
I jotted down a few themes for the start of the year, and of course failed to organize those ideas into any sort of comprehensive blueprint for the upcoming year (which never works anyway). But first I would like to note a couple of items from the end of October:
Perhaps one of the best calls of the year was Ackman saying he covered his bond short as tens were around 5% citing a slowing economy and a risk of being short with yields at new highs. That was October 23, 2023.
At essentially the same time on October 22, Senator Mitch McConnell was interviewed on Face the Nation and said this:
“If you look at the Ukraine assistance, let’s talk about where the money is really going. A significant portion of it is being spent in the US, in 38 different states. We’re replacing the weapons that we sent to Ukraine with more modern weapons. So, we’re rebuilding our industrial base. …No Americans are getting killed in Ukraine; we’re rebuilding our industrial base. The Ukrainians are destroying the army of one of our biggest rivals. I have a hard time finding anything wrong with that.”
https://www.youtube.com/shorts/slgsZnYnF3k
Though I personally agree that the US should be rebuilding our industrial base, I have a hard time finding much right about the rest of it. It’s like the financialization of the US economy. You can’t always expect a beneficial outcome without the risk of getting your own hands dirty.
In any case, it was right around this time, coinciding with the Nov 1 FOMC (no more hiking), that stocks and bonds started their historic two month sprint into year-end. As many have noted, going into the Nov FOMC, financial conditions were quite restrictive. That has now reversed into a massive relaxation. Ten-yr yield from 4.93% on Oct 31 to 3.80% Dec 27. SPX from 4194 on Oct 31 to 4781 Dec 27 (+14%).
The broader themes are the following:
The US Gov’t has continued to shift more (formerly) private activities onto its own ledger. Kevin Muir was recently interviewed by Adam Taggert on Thoughtful Money and emphasized the role of fiscal dominance in terms of pushing recession off the calendar. Given the upcoming election, the Federal Gov’t will likely continue the same agenda, perhaps with even more gusto. Attitudes like McConnell’s aren’t much of an impediment. And Mideast strife pours gas on the fire. I perceive the government as much less forceful in terms of a multiplier effect than private enterprise. Hangover’s gonna be a bitch.
The Taiwan election is January 13, pitting the DPP party which asserts independence from China vs the KMT party which is seen as more open to pro-China views. China’s economic data continues to show weakness; Mfg PMI data was just released at 49.0, near the low of the year. The Shanghai Shenzhen CSI 300 ended the year 18% lower than the high posted in January. The ten-year yield ended at 2.53% vs a high of 2.92% in February. If the DPP win, then risks of military confrontation increase. If not, then perhaps more peaceful domestic stimulus will occur. Either way, Xi has to lift the doldrums.
Bank of Japan meeting is Jan 22/23. There is likely no delicate way to end negative funding rates in Japan, though the removal of the 50 bp cap on the 10y JGB was accomplished without much of a broader reaction. High of the year in 10y was 95 bps in November, last at 61 bps. Possible withdrawal of Japanese funds invested in other western markets?
Q2 turmoil resulted from regional bank failures, accentuated by bond losses and deposit flight. Money Market Funds siphoned money away from banks as yields exploded. As Doug Noland notes, “One word we didn’t hear much from the Fed in 2023: ‘macro-prudential’.” It’s reported that money market funds now total around $6 trillion; the interest flows on that ($300b ?) go a long way in supporting consumption. Some analysts call it ‘money on the sidelines’ which will flow into stocks as the Fed begins to cut rates. I tend to look at it in a more perverse way, thinking that Asian yields may rise, and that as the Fed begins to cut short-end rates, curve steepeners will become popular, putting upward pressure on long bond yields. Fiscal deterioration will add to long-end weakness. As Torsten Slok of Apollo noted at the end of September, 31% of all US Gov’t debt outstanding, or $7.6t, matures within twelve months. Whether it’s called an increase in “term premium” or a fraying of confidence in the fiscal position of the US gov’t, I believe yields on 10s and 30s will exceed the highs of 2023. The chart below shows Fed’l Gov’t Interest Payments/ Current Tax receipts. A worrisome acceleration in the last two years to a 25 year high of 35%.
This year the ten-year yield ended at the starting point, just like Frankie and Spaz. Another visualization is the Fatboy Slim ‘Weapon of Choice video featuring Christoper Walken, “you could blow with this/you could blow with that” but wind up in the same chair at the end anyway….
For your listening pleasure I’ve also included a piece from Slim Harpo, ‘Scratch my Back’
| 12/22/2023 | 12/29/2023 | chg | ||
| UST 2Y | 429.0 | 426.0 | -3.0 | |
| UST 5Y | 388.5 | 385.0 | -3.5 | |
| UST 10Y | 390.6 | 388.0 | -2.6 | |
| UST 30Y | 405.8 | 403.0 | -2.8 | |
| GERM 2Y | 240.0 | 240.4 | 0.4 | |
| GERM 10Y | 196.5 | 202.4 | 5.9 | |
| JPN 20Y | 133.0 | 138.2 | 5.2 | |
| CHINA 10Y | 261.0 | 256.0 | -5.0 | |
| SOFR H4/H5 | -151.0 | -156.5 | -5.5 | |
| SOFR H5/H6 | -31.0 | -35.0 | -4.0 | |
| SOFR H6/H7 | 7.5 | 8.5 | 1.0 | |
| EUR | 110.14 | 110.38 | 0.24 | |
| CRUDE (CLG4) | 73.56 | 71.65 | -1.91 | |
| SPX | 4754.63 | 4769.83 | 15.20 | 0.3% |
| VIX | 13.03 | 12.45 | -0.58 | |
And forward though I cannot see…
December 29, 2023
*********************
–Fairly quiet session yesterday. Yields rose, seven-year auction was a bit weak. Tens finished up 6 bps to 3.846% while 30s added 4.3 bps to 3.986%. On the SOFR curve reds through blues were down 4.5 to 5.5 bps in price. As mentioned earlier in the week, 5s and 10s seem to like 3 7/8% and 30s are comfortable at 4%. I think those yields are too low, but that’s how we’re finishing out 2023.
–Pretty fascinating Doomberg piece out today, mostly about potential energy production in the western hemisphere. President Monroe (and the Monroe Doctrine) are used as the hook to the piece -the US was (unsurprisingly) running federal gov’t surpluses in 1823 – but there’s also this tasty excerpt relating to gold:
How things have changed in just two short centuries! With the price of gold fixed at just under $20 an ounce, US federal government expenditures amounted to the equivalent of less than 600,000 ounces of the stuff over the nine months referenced by Monroe. By contrast, today’s sprawling federal bureaucracy spends that much gold in about 100 minutes, churning through the global market cap of all the gold ever mined roughly every two years.
–Applying some of the bitcoin analysis I’ve seen, that means gold should be a LOT higher! [insert two rocketship emojis here. maybe three]
–Anyway, back to the staid world of interest rates. The Federal gov’t currently has unfettered ability to borrow at low long-term rates to keep the bureaucratic plates spinning, as the leading investment minds focus on the magnitude of rate cuts in the year just before us.
Still, thou art blest, compar’d wi’ me!
The present only toucheth thee:
But Och! I backward cast my e’e,
On prospects drear!
An’ forward tho’ I canna see,
I guess an’ fear!
Happy New Year!
******************
Here are a couple of plays from yesterday. The first is bearish, but still targets FF about 50 lower than current:
SFRJ4 9550/9525/9500p fly 4.75 paid for 10k. Settle 5.0 ref SFRM4 9546.5
SFRU4 9525/9600/9675c fly bought 11k, settled 18.5 ref SFRU4 9587.5.
BLOCK SFRM5 9675/9750/9850/9925c condor bot vs sale SFRU4 9543.75/9475.0ps, paid 6.75 for 20k.
9675c 62.25
9750c 33.25
9850c 13.75
9925c 7.00 >>22.25
9543.75p 22.0
9475.0p 5.75 >> 16.25 6.0 pkg.
In order for the Sept’24 put spread to settle worthless, we need at least 75 bps of cuts, which would take target range to 4.5-4.75% and likely leave EFFR around 4.58%.
Easy markets create false fundamentals, weak fundamentals create tough times
December 28, 2023
*********************
–Spot gold at highest close ever $2077 (though not so in GCG4, which settled at 2093.1, vs a high settle 2128.8 in early May).
–Yields continue to press lower. Solid five-year auction with seven-year coming today. According to BBG the year’s range on tens is 3.31% to 4.99%. Closed out yesterday at 3.79%, almost exactly where we started the year. So, we’re 48 off the low and 120 off the high.
–New low in SFRM4/U4 calendar at -42 (9550.5/9592.5). The most inverted one-year spread remains the first, SFRH4/H5 at -156.5 (9502.5/9659.0), down 4.5 on the day, also at a new low. The lowest level for the first one-yr spread was -192, set in May, and for the second slot it was -177. Currently the second 1-yr spread is SFRM4/M5 at -129.
–Price action in late April and early May, after the regional bank blow-ups, reflected fears of expanding fractures. That period featured a weak dollar, (DXY is now lower than May’s low), soaring gold, and the most inverted one-year SOFR calendars ever. Green SOFR contracts were around 2.75-2.8% (9720). Green pack settled yesterday at 9692.5 or 3.075%. However, it all reversed as the Fed did not ease. This time there’s little push-back against rapidly easing financial conditions, a fact not lost on equities. Is it worth noting a BBG article, ‘Prices of a Vital Food, Rice, Just Surged to a Fresh 15-Year High’ ?
Going Nuke-ular
December 27, 2023
********************
–Quiet session in rates on Tuesday. Front end weakness probably related to bill and 2y auctions. Curve flattened as longer dated maturities saw marginal drops in yield. SFRM4 -4 at 9546.5. SFRM5 +1 at 9672.5, SFRM6 +2.5 at 9684.0 and SFRM7 +2.5 at 9675.5.
–On the treasury curve, the long bond is gravitating toward 4%, (4.043% at futures settle), while 5s and 10s are comfortable around 3 7/8%, (3.875% and 3.886%). Five-year and two-yr FRN auctions today.
–CLG3 traded above $76/bbl yesterday, but is back around 75 this morning. Still a decent rebound from sub-70 early in the month. Perhaps of more interest is uranium (in a longer term timeframe). From Y-charts, price as of the end of Nov is 62.29/lb, having started the year around 40. In June 2007 it hit $136. Just a mention, as nuclear power seems to be ramping up. Reuters reports: ‘Japan lifts operational ban on world’s biggest nuclear plant’, though Tepco still needs local gov’ts to approve the re-opening.
–Below the uranium chart is an interesting excerpt from @WinfieldSmart. I haven’t verified, but SPX adjusted for money supply growth has never taken out the 1929 high.
Buy Now and Really, Really, Really Pay Later
December 26, 2023
********************
–Once again, new low in SFRH4/M4 at -49 (9501.5/9550.5). The lowest of any 3-month spread over the past year was -58, but it was a forward spread, on BBG SFR5 vs SFR6, (though in the old convention I’d call it last white to first red or 4th to 5th). H4/M4/U4 fly settled -9.0 (-49/-40), worth buying -14 to -12.
–Inflation data confirm the Fed is done. Six month annualized Core PCE 1.9%. April FF for the first time settled more than 25 lower in yield than a 25 bp cut. That is, Fed Effective is 5.33% or 9467. A 25 bp cut would be 5.08% or a price of 9492.0. FFJ4 settled 9492.5.
–News today includes Chicago Fed’s National Activity. It’s around the lowest level since covid. November 2022 the low was -54, March 2023 the low was -50. Last was -49. If I know Goolsbee it will be around -30. He’s quite a prankster.
–This week’s auctions kick off with $75b in 13-week bills, $68b in 26-week bills, $44b in 52-week bills and $57b in 2-yr notes. Total $244b, nearly a quarter of a trillion dollars… I guess SOMEONE ran up the credit card bill going into Christmas. And there’s more coming on Wednesday and Thursday (5s and 7s and other various bills and FRNs).
–This is probably nothing (Game of Trades)
Steel
December 24, 2023 – Weekly comment
******************************************
I worked my whole life in the steel mills of Gary
Like my father before me I helped build this land
Now I’m seventy-seven and with God as my witness
I earned every dollar that passed through my hands
Minutes to memories – John Mellencamp
I had watched a TV documentary about old-time steelworkers working the mills. Hard, dirty work. I wish I could find the clip, but one of the men interviewed said (paraphrased). “You were something if you worked in the steel mill. You were paid well. You could afford things.” Pride in the work and in the community, in the classic sense of the word.
I’m a fan of Michael Every of Rabobank, who was recently interviewed on Adam Taggert’s Thoughtful Money. Not that I agree with Every one of his arguments (see what I did there), but he has a breadth of knowledge and historical context that I can only envy. In any case, the main thrust of his comments during the interview was that America’s outsourcing of production and transition to what he calls “frivolity, fictitious capital, and bullshit” is not working. The financialization of the American economy is no longer likely to bring dominant results in a changed global order. So, the idea of some sort of industrial policy, with tariffs and subsidies is his suggestion. I’m not so sure if that’s the correct path to a better tomorrow, but the inward turn toward production and sourcing of inputs makes some sense.
And that’s why the sale of US Steel to Japan doesn’t sit well with me, as I think steel is a strategically important industry. And that’s why the addition of Norinchukin to the Fed’s list of Standing Repo Facility counterparties on Dec 1, while perhaps understandable raises a few questions. If the big banks are strategically critical in our economy to the point of supporting non-US based entities, maybe big supply-chain industries require consideration.
In terms of financialization, the Fed’s Bank Term Funding Program is a case in point. The outstanding amount is currently only $131 billion, not huge in the big picture. It surged with the regional banking crisis of course, but has recently re-accelerated in December. This program allows a bank to pledge treasuries at par value and obtain credit for up to a year, at a rate of the one-year overnight index swap plus 10 bps. Current rate 4.85%. https://www.frbdiscountwindow.org/
Obviously that’s an attractive funding rate, especially given that treasuries trading well below par value can be pledged at par. Below is a chart of BTFP outstanding balance. Though it’s relatively small, is there a possibility of renewed fragility in the system? Note as well that Ueda just signaled a possible shift in the Bank of Japan’s ultra-easy policy. Next BOJ meeting is Jan 22/23.
Treasury is doling out $1 trillion a year in interest on US debt. Outstanding credit card debt (revolving) is around $1.3 trillion, and “accounts assessed interest” are at 22.77%. Excluding non-revolving auto loans, it’s reasonable to assume interest payments of nearly $200 billion per year. Those flows are likely affecting very different parts of the populace. In the aggregate, things may look ok, but certain segments are under increasing duress. Changes at the margin affect the whole.
*******************************
The inflation numbers came in favorably. As Nick Timiraos wrote: “The Core PCE index rose 3.2% in November from a year earlier. Over the last six months, the core PCE price index rose 1.9% at an annualized rate.”
In other words, the Fed’s at target.
So, there is justification to cut. Which the market has priced. In the clearest example, consider Friday’s settle of FFJ4 at 9492.5, a rate of 5.075%. Current EFFR (Fed Effective) is 5.33%, a price of 9467.0. In other words, for the first time, at settlement, there is slightly MORE than 25 bps of ease reflected in this contract. (FOMC meetings are Jan 31 and March 20). FFF4/FFG4 settled -3.5 (9467.5/9471.0) so there’s a bit over 10% priced for a 25 bp ease at the Jan meeting. Feb/April settled -21.5 (9471.0/9492.5). They’re pretty sure the first ease comes in March. On the SOFR curve, SFRH4/SFRM4 three-month calendar spread settled -49.0 (9501.5/9550.5). A lot of observers are saying an ease will NOT come in the first half. The market is sending a very clear signal that it will.
I would note that the highest contract on the SOFR curve is now SFRZ5 at 9684.5 or 3.155%. In the panicked period from March to May, no sofr contract settled above 9750. Perhaps it’s fair to say that the terminal ease won’t go below 2.5% this time around. In that connection, I looked back at 1994. The Fed had eased to the then-low FF rate of 3%. That rate held for over a year. Of course, at that time the thirty year yield had a hugely positive spread to FFs, though the spread declined through 1991.
Perhaps this time the Fed won’t have to test the zero-bound. On Friday, SFRZ4 settled 9624.5 or 3.755%. Given today’s treasury curve, 5’s (3.89%) 10’s (3.90%) and 30’s (4.06%) would all have positive carry by the end of next year.
Could we have a scenario where the BOJ starts to tighten, pulling capital away from longer dated US assets, with the unemployment rate starting to rise, justifying Fed cuts of 125 to 175 bps next year as inflation stabilizes around current levels? Positive curve, but real rates still at relatively restrictive levels.
Treasury auctions of $57b 2-years, $58b 5-years and $40b in 7-years, Tues, Wed, Thurs. Perhaps a bit much to digest in a holiday week.
https://www.youtube.com/watch?v=H4QTQQytnd8
| 12/15/2023 | 12/22/2023 | chg | ||
| UST 2Y | 445.1 | 434.2 | -10.9 | wi 429.0/428.5 |
| UST 5Y | 392.6 | 388.8 | -3.8 | wi 388.5/388.0 |
| UST 10Y | 392.6 | 390.6 | -2.0 | |
| UST 30Y | 402.5 | 405.8 | 3.3 | |
| GERM 2Y | 250.4 | 240.0 | -10.4 | |
| GERM 10Y | 201.6 | 196.5 | -5.1 | |
| JPN 20Y | 142.1 | 133.0 | -9.1 | |
| CHINA 10Y | 263.6 | 261.0 | -2.6 | |
| SOFR H4/H5 | -148.0 | -151.0 | -3.0 | |
| SOFR H5/H6 | -32.5 | -31.0 | 1.5 | |
| SOFR H6/H7 | 5.0 | 7.5 | 2.5 | |
| EUR | 108.97 | 110.14 | 1.17 | |
| CRUDE (CLG4) | 71.78 | 73.56 | 1.78 | |
| SPX | 4719.19 | 4754.63 | 35.44 | 0.8% |
| VIX | 12.28 | 13.03 | 0.75 | |
From the Fed
The Bank Term Funding Program (BTFP) was created to support American businesses and households by making additional funding available to eligible depository institutions to help assure banks have the ability to meet the needs of all their depositors. The BTFP offers loans of up to one year in length to banks, savings associations, credit unions, and other eligible depository institutions pledging any collateral eligible for purchase by the Federal Reserve Banks in open market operations (see 12 CFR 201.108(b)), such as U.S. Treasuries, U.S. agency securities, and U.S. agency mortgage-backed securities. These assets will be valued at par. The BTFP will be an additional source of liquidity against high-quality securities, eliminating an institution’s need to quickly sell those securities in times of stress.
In: Eurodollar Options
Deflating…except for gold
December 22, 2023
*********************
–Today features PCE deflator, expected 0.0 m/m and 2.8 yoy from 3.0% last. Core expected 3.3 from 3.5. Attention now seems to have shifted to 6-month annualized growth rates in order to illuminate recent improvements in the flight path to target. However, Core Service prices are still sticky and likely require higher levels of unemployment to decelerate. On the other hand, I was pleasantly surprised to fill the gas tank at sub-$3/gallon yesterday. In the first half of December, WTI got below $70/bbl, but this morning CLG4 is $74.50 (up 0.60). Gold currently +16 at 2067.30, a modest effort at an upside breakout (which is about to turn into a full-blown explosion!)
–Curve steepened a bit yesterday as stocks took back some of Wednesday’s sell-off. SFRM4 and SFRM5 both up 3 at 9547.5 and 9673, while M6 was only +1 at 9683 and M7 down 0.5 at 9675. Again, note that every contract from June’25 back is about the same price…around 3.2% yield. On the treasury curve 2s were down 2 bps at 4.347% and 10s rose 2 bps to 3.894%. 2s, 5s and 7s auctioned next week. Stocks a bit weaker this morning, perhaps in sympathy with China as stocks there were hit due to restrictions on gaming. (rather than playing video games, why don’t you all start speculating in stocks…)
–Continued exit of SOFR call spreads. Yesterday about 50k SFRU4 9700/9800cs sold; settled 9.25 ref 9588.0. SFRH4/M4 3-month calendar posted a new low at -48 (9499.5/9547.5) and H4/H5 one-year spread hit a new recent low of -153.5. The front 3m spread, March/June at -48, is more inverted than the front spread had gotten in the aftermath of the regional banking crisis (April into May). However, at that time the second spread had settled as low as -50 and the third at -56. Interestingly, June/Sept (SFRM4/U4) is currently -40.5 and Sept/Dec -36.5. Relative to the hiking pattern that got increasingly more aggressive, the easing path is perhaps perceived as steadier over time. I’m not even sure if that’s a correct interpretation…however, it used to be that rates were slashed in downturns and raised more gradually. This easing cycle could look more like the hiking campaign of 2004 to 2006, i.e 25 bps at a time, at every meeting. As Argentina’s Milei said yesterday in reference to failed socialist policies, “…the problem is not the chef, but the recipe.” Time for a modicum of caution as the recipe may undergo multiple changes in 2024.
–Peace and goodwill towards your fellow man. Merry Christmas!
A bit of volatility at a less liquid time of year
December 21, 2023
*********************
–Afternoon swoon in stocks underpinned the bid in rate futures. Good Reuters headline: Stocks Sober Up, But Rate Cut Party Lives On. SPX fell 1.5% after having made a slight new high. Note that from mid-March to late July SPX rallied from around 3800 to 4600 in four and a half months. Impressive rally. From the end of October to yesterday , not quite two months, SPX rallied nearly the same point amount, from around 4100 to just under 4800, compressed in less than half the time. No wonder there’s a pullback!
–New low in SFRH4/M4 at -47 (9497.5/9544.5). Also a new recent low in SFRH4/H5 at -152.5 (9497.5/9650). Rate cut perceptions are being somewhat front loaded as nearer spreads invert further. Attached is a chart of Jan/Feb FF spread and Feb/April. These two spreads forecast the Jan 31 and March 20 FOMCs. Jan/Feb settled -3 (9467/9470) around a 10% chance of a cut at 2024’s first meeting. But Feb/April settled -19 and was -20 late, indicating about 80% odds of a cut in March.
–30 year yield went out just over 4%, down 3 bps (ref USH settle 124-13). Curve from 2s forward steepened slightly.
–GDP revision this morning. Philly Fed expected -3.0 from -5.9.
