The Marlboro Man

September 24, 2023 – Weekly Comment
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In the mid-1950’s Philip Morris gave Chicago advertising upstart Leo Burnett an assignment:  Sell Marlboro cigarettes to men.  At the time, the filtered pinkish end of the brand gave it more of a feminine aesthetic.  The creative agents at Burnett immediately decided to focus on the most masculine of images; the cowboy.  They tweaked the package design, ran full page ads, and as described in a documentary, “The Marlboro Man was able to take a product that was considered feminine because of that filter, and suddenly make it seem hardcore. They completely flipped the demographics…”  Within a month Marlboro became the top-selling filtered cigarette in New York. 

Namesake Leo Burnett said it was one of the greatest campaigns he’d ever seen, “I just jumped out of my chair!”  The brand continued to grow with the ‘Marlboro Country’ campaign in the 1960s.  The Burnett team thought some of the new cowboy ads looked a bit contrived, so they went out west and starting shooting spots with REAL cowboys.  They presented the concept to a research company who warned, “No one can identify with cowboys, if you run this, you’ll run the brand out of business.”  The consultants left the room and Jack Landry of Philip Morris said, “Run it”.  The campaign worked.  Sometimes you’ve got to go with your gut.  (And have a strong sense of your core customer).

The documentary is a fantastic slice of old Chicago and classic advertising.  Here’s a link:

The Federal Reserve has been involved in a crusade to bring inflation down to its 2% target.  Make no mistake, “forward guidance” is an ad campaign.  Where Powell has become most successful is in rounding up Federal Reserve members to commit to the same message.  And that’s the tagline from the 2022 Jackson Hole meeting: “… we must keep at it until the job is done.” 

The Fed knows that bankruptcies have been increasing, that loan delinquencies are moving up, that M2 growth is at an unprecedented level of contraction, that JOLTs on a yoy basis have declined at a 22% rate, only surpassed briefly by the COVID plunge and the fall in 2008 (chart below).  If I know it, the Fed knows it.  There are many pundits, critical of the Fed, who always start with, “What the Fed doesn’t understand is…” 

JOLTS yoy % change

It’s clear that the Fed has gotten economic projections wrong, and undoubtedly, their current forecasts are likely to miss the mark.  But rather than me giving a half-assed opinion on what the Fed has missed, I think I’ll focus on not missing what the Fed is telling me:  The trend for long-dated assets is now lower.  The 50 bp increase in the FF forecast from June’s 4.6% to last week’s 5.1% is a crystal clear endorsement of the “higher for longer” advertisement.  Longer dated assets had pinned hopes on a Fed flip to easing. After the June FOMC, the red SOFR pack was around 9625 or 3.75%.  On Friday the reds ended at 9570 or 4.3%.  Post-June FOMC 10s were 3.75%.  On Thursday the yield poked above 4.5% and ended 4.436%, up over 11 bps on the week and nearly ¾% higher than late June.   

I’m not saying that stocks go straight down, or that something can’t break (hard) and throw the entire macro environment for a loop.  Many trades in US rates have the theme of “forced easing, when does it happen and how hard could it be?”   For example, there was a buyer last week of 40k SFRF4 9475/9525/9575c fly for 3.5 to 3.75.  With current EFFR of 5.33% it’s clear that this trade requires strong expectations of easing, starting at the end of 2023 or in the beginning of the new year. (Jan options expire Jan 12, with SFRH4 underlying, well before the Jan 31 FOMC). The middle strike is 4.75%.  Again, I would mention something like SFRZ3 9475/9550c 1×2 for 0.25 credit to buy the lower strike.  A strong perception of ease starting at the Jan 31 FOMC or before would put this trade in play.  However, the Fed’s muted response to the regional banking problems of March make it clear that the bar for easing is now quite a bit higher than previously thought. 

Credit: Game of Trades

The Fed is using its tools to slow the economy and create tighter financial conditions, which includes lower equity prices.  The terminal FF rate has perhaps already been achieved, or will be with one more hike.  But the tool that is never mentioned is patience.  Let the weight of high short-term rates work through the system.  Funding rates above all measures of inflation will create a lot of angst for companies that need to roll debt in the coming year. Some won’t make it. The ‘real’ rate as expressed by the ten-year inflation-indexed note is at its highest level since 2009, ending the week at 2.06%.  Additionally, banking issues continue.  Year-over-year bank credit (chart below) resembles M2.  Take a look at a chart like Bank of America (BAC).  It’s near the low of the year and is essentially equal to the level associated with SVB in March.  BAC looks about the worst, but KRE (US regional bank ETF) and BKX (KBW Nasdaq money-center bank index) are both on recent lows and below the original plunge levels of mid-March.

   Yoy growth in bank credit

This week includes auctions of 2, 5 and 7 year notes.  Should sail through as only $16b in new cash is being raised.  The week (and month) ends with PCE prices, expected 3.5% yoy vs 3.3% last, with yoy Core 3.9% vs 4.2% last.

There was a powerful scene in the Chicago documentary featuring a black woman, Carol H Williams.  Hired in 1969 in an obviously tough environment, she rose to creative director and vice president in six years. “I loved Burnett from the first time I walked in there.”

“I was not afraid to take the shot and I took the shot”

Maybe the Fed (or the entire country) could use her to head up communications!

OTHER THOUGHTS/ TRADES

On June 1 the Dec’3/Dec’4/Dec’5 butterfly settled -141 (9521.0/9682.0/9702.0).  On Friday it settled at the high of the year, -14.5 (9453.0/9535.5/9603.5).  Obviously, the biggest adjustment was SFRZ4 which declined nearly 150 bps in four months.  SFRZ3/Z4 went from -161 bps to -82.5.  The forward guidance on higher for longer has been reflected in these spreads.  Over the same timeframe, the 30y bond yield has risen from 3.81% to 4.52%.  While the sell-off in red SOFR contracts may not have a lot more to go, it’s more difficult to make that claim on bonds, especially as a possible gov’t shutdown further exposes runaway spending (and laughable political efforts to stop it).   

COST (Costco) reports Tuesday.  Stock is near the high of the year.  Clues about the health of the consumer. 
MU (Micron Technology) reports on Wednesday after close.  It’s been a beneficiary of the AI splurge.  Possible sign that this mania has been tempered? 

	9/15/2023	9/22/2023	chg
UST 2Y	503.5	512.0	8.5	wi 507.0/506.5
UST 5Y	445.3	456.7	11.4	wi 457.0/456.5
UST 10Y	432.2	443.6	11.4
UST 30Y	441.2	451.8	10.6
GERM 2Y	321.5	325.9	4.4
GERM 10Y	267.5	273.9	6.4
JPN 20Y	142.8	144.9	2.1
CHINA 10Y	266.8	269.2	2.4
SOFR Z3/Z4	-97.0	-82.5	14.5
SOFR Z4/Z5	-63.5	-68.0	-4.5
SOFR Z5/Z6	-9.0	-8.5	0.5
EUR	106.60	106.45	-0.15
CRUDE (CLX3)	90.02	90.03	0.01
SPX	4450.32	4320.06	-130.26	-2.9%
VIX	13.79	17.22	3.43

Sell Mortimer, SELL

September 22, 2023

–If there was ever a repudiation of MMT (Modern Monetary Theory) it’s going on right now.  No Stephanie, the gov’t cannot spend whatever it wants without consequences.  The curve bear steepened yesterday with the ten year yield up 13.3 bps to 4.478% while the two year rose 3 bps to 5.146%. 2/10 (attached) made a new recent high of -66.8.  Stocks tumbled with SPX -1.6% and Nasdaq  -1.8%.  SOFR curve also steepened with reds -8.625, greens -11.75, blues -14.75, golds -16.125.  The green, blue and gold packs (3rd, 4th, 5^th years forward) are all right around 4% at 9602, 9606, and 9597.  The higher for longer theme is weighing on everything.  However, the BOJ is still holding ultra-easy policy and tacitly letting the yen slide.  $/yen now at the year’s high 148.20 having started 2022 around 131.

–One large SOFR option trade of interest: buyer of over 40k SFRF4 9475/9525/9575 c fly for 3.5 to 3.75 (settled 3.75 against underlying SFRH4 9459.5).  Expiration is Jan 12.  I guess this guy’s idea of a Happy New Year is when the wheels fall off the economy and the Fed is forced into cuts.  Taking the opposite side was a buyer of about 60k FFX3/FFF4 spreads for 6.0 (9460/9454).  FOMC meetings are Nov 1, Dec 13 and Jan 31.  Somewhat strange OI changes: according to prelims Nov had volume 231k and Jan 138k.  OI was up 59k in Nov and just 7748 in Jan.  In any case, if the Fed were to hike in Nov and skip in Dec, (or if perceptions solidify around that scenario) then the spread would move towards zero.  So this spread really isolates odds for a December rate hike: a skip in Nov and a hike in Dec, or hike/hike.  Pay 6 seems a bit high to me.  The Jan/Feb spread, FFF4/FFG4, settled 0.5, 9454 and 9453.5.  That spread isolates the Jan 31 meeting; a price near zero indicates that nothing will happen.  A more passive/aggressive trader than the Jan call fly buyer would sell F4/G4 into inversion, looking for the Jan ease.  SFRZ3/H4 settled -7.5 (9452.0/9459.5).

–S&P Composite PMI was 50.2 last, expected this morning at 50.1.  

2/10 below

SOFR curve won’t adjust all the way to Fed’s projections

September 21, 2023

–For a long time, long dated assets were underpinned by the idea that Fed rate increases would be significantly reversed in the coming year.  That assumption was crushed yesterday as the Fed raised the FF end-of-2024 dot from 4.6 to 5.1.  The 2023 estimate for FF remained at 5.6, same as June, indicating one more hike this year.  I marked tens yesterday (at the time of futures settle) at 4.345% but this morning the yield is over 4.42%.  SPX down nearly 1% yesterday and is lower as of this morning, with ESZ printing 4428, down 19.

–There had already been a large adjustment to higher yields in red SOFR contracts as mentioned yesterday.  So, the red pack barely changed on yesterday’s settle at +0.75.  SFRZ4 was down 1 at 9538 and SFRH5 was +0.5 at 9568, with more deferred contracts settling +2 to +3.  Even as the Fed’s FF projection took the 2023 to 2024 spread from -100 bps to -50 bps, the SFRZ3/SFRZ4 spread was unch’d at -86 (9452/9538).  It might be more reasonable to ‘split the difference’ and move Z3/Z4 towards -75, but the market does not currently think the Fed can carry through on keeping the rates high for another year given deterioration in some economic data.  Perhaps more interesting is the 2024 to 2025 FF spread.  The Fed kept that at -120 bps, from 4.6 and 3.4 estimates made in June to 5.1 and 3.9 yesterday.  SFRZ4/SFRZ5 did make a new low at -70, down 3 on the day (9538/9608).  The Fed’s dot plot suggests the 2023/2024/2025 butterfly at +70 bps -(5.6 – 2*5.1 +3.9).  While the Z3/Z4/Z5 fly has recently barreled higher and settled yesterday at a new high of -16 (9452/9538/9608), a move into positive territory would be surprising.

–There was a buyer of about 10k 0QH4 9525/9425ps for 14.5 (ref 9577) yesterday in a nod to the Fed.  Settled 16.25 (18.75/2.5) ref SFRH5 9568.0.  So, on settlement H4 is still at a rate of only 4.32%.  

–The economy has simply been more resilient than the Fed had anticipated.  The risk is that this SEP is over-correcting and the guidance embedded in the projections will tighten financial conditions (lower stocks, higher rates, stronger USD, wider credit spreads) such that the June estimates would have ultimately been more accurate.

Today’s missing hike has been priced into SFRZ4

September 20, 2023

–All treasury yields ended at new highs except for the long bond, with 2s up 4.5 to 5.105%, 5s up 6.0 to 4.52% and 10s up 4.8 to 4.365%.  The 30y ended at 4.424, up 3.0, just a couple of bps off the high.  Once again new contract lows in SFRH4 to SFRZ5, with H5, M5 and U5 settling down 9 on the day (weakest).  Even on new lows, open interest is declining in SOFR: Z3, H4, M4, U4 lost a combined 77k contracts, more indicative of long liquidation than new sellers.

–It’s FOMC day, widely expected to result in a policy skip with the door left open for a November hike. 2024 dots for growth and FF target will likely both be revised higher.  FFX3 settled 9459.5 or 5.405% just 7.5 bps above the current EFFR, so as of yesterday, even the November meeting leans towards the idea of the Fed being done.  SFRZ3 settled 9453.0 (-0.5).  More important has been price action in forward contracts, which says more about duration than level.  Consider SFRZ4: on 8/28 it settled 9564.5, by 9/1 it was 9581.5, and yesterday settled 9539.0.  There’s your forward restraint being priced in with a ‘hike’.  A fall of 24.5 bps since 8/28!  And, if measured from 9/1, a plunge of 42.5.  Of course at yesterday’s settle of 4.61%, there is still significant ease priced into next year, but not in the category of ’emergency’ rate cuts.  That’s not to say that large cuts couldn’t occur, for example there is continued buying of SFRM4 9600/9700 cs, yesterday about 20k for 7.5 (settled 7.25 ref 9480.0).  

–I attached a chart of SFRZ3/Z4/Z5 butterfly which has rumbled from -140 since the start of June to -22 yesterday, as SFRZ4 withdrew from the idea of aggressive easing.  I also added a chart of Russell2k to SPX ratio, as many have pointed out the relative weakness of small caps.  Are these two charts consistent?  Perhaps so, as the fly reflects higher for longer, which will kill prospects for small cap companies that need to roll debt next year.

New high SFRZ3/Z4 in front of FOMC

September 18, 2023

–The US curve was mixed Monday.  The two year yield rose 2.5 bps to 5.06% while tens fell 0.5 bp to 4.317%.  2/10 now -74.3. On the SOFR curve, SFRZ3/SFRZ4 made a new high of -94 (9453.5/9547.5) as selling pressure is centered on reds (new contract low settles again in U4, Z4, H5).  In front of tomorrow’s FOMC, the market is increasingly accepting ‘higher for longer’.  However, SFRZ4/SFRZ5 made a new recent low of -67.0 (9547.5/9614.5).  Therefore, SFRZ3/Z4/Z5 fly is making a new high of -27.  Again, it’s the 3rd, 4^th and 5^th SOFR contracts that are weakest.  My view is that Z4 is in for a bounce post-FOMC as open interest changes and implied vol do not seem to confirm a move to new lows (open interest is not increasing and vol slightly lower on new lows).  We’ll see what Powell has in store for us; clearly the GDP growth estimates must be revised higher for 2023 and 2024.

–For context on SFRZ3/Z4, the high just after SVB on March 15 was -56, and the subsequent low in July was -162.5.  In terms of vol, SFRU4 9525^ was over100 a week ago when atm.  Settled yesterday at 95.75 even as the contract has moved to 9514.5.  The 9512.5^ settled 92.5 yesterday.

–20y auction today.  At futures settle the wi was 458/457.5.  

–So much for re-filling the SPR sub-$70/bbl.  CLX3 settled 90.58, was 90.90 late yesterday and prints 91.35 this morning.  We can always sell more bonds at low rates to raise money to buy oil until it comes back to our $70 bid, right? 

–A couple of bullet points from Cass Transports yesterday:

• Despite overall growth of the economy, for-hire freight volumes were down 10% in August. See the role that private fleets are playing.
• Total spending on freight is down 25% year over year.
• The Cass Truckload Linehaul Index, measuring linehaul rates only, declined 11.5% in August 

Forward easing expectations keep declining

September 18, 2023

–Friday saw yields push higher, with new contract lows in SFRM4 (9487), U4 (9518.5) Z4 (9552.0) and H5 (9580.5).  Tens +3.6 bps to 4.322%. This would have been the IMM date for front Sept ED to settle to libor, so now SFRU4 is one year forward, and at 9518.5 it’s just a little more than 50 bps below the current Fed Effective rate of 5.33.  Amazingly, this contract traded above 9700 during April and May, as financial stress post-SVB could have sparked Fed easing.  But it didn’t.  Perhaps there’s now more delineation between financial market stress and “the real economy”.  Maybe.  In any case, Soc Gen this morning is plunging (-9%) as its new CEO outlined his strategic vision which features little to no growth in the short term.

https://www.reuters.com/business/finance/socgen-eyes-return-tangible-equity-rote-between-9-10-2026-2023-09-18/

The Soc Gen chart looks a bit like Sisyphus slowing rolling the rock up the hill going into early March, followed by a plunge, and a steady ascent again since then, followed by today’s dive.

–This week brings TIC flows today, Housing Starts and the 20y auction Tuesday, and the Fed meeting Wednesday.  The Fed is expected to hold rates steady, but forward guidance and growth estimates will be key.  In a contrast with the eurozone, the US growth estimate in the SEP for 2024 almost certainly will be notched higher from +1.1% which was June’s forecast.

–Large buyer of SFRZ3/H4 Friday -11 to -10.5 led to a new high settle of -10 (9455/9465).  Open interest fell less than 10k in both contracts.    

Tighter conditions can lead to unexpected snaps

September 17. 2023 – Weekly Comment
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The FOMC meeting is Wednesday, widely forecast to be a skip. The current Fed Effective rate is 5.33% and FFV3 settled 9466.5 or 5.335%.  The Nov 1 FOMC is still in play with FFX3 closing 9459.5 or 5.405%.

The ECB raised the policy rate this week, but significantly lowered forward growth projections to 0.7% from 0.9% for 2023, and 1.0% from 1.5% for 2024.  Lagarde: “…we are going through a period of about five quarters of very, very sluggish growth…”

The Fed’s Summary of Economic Projections (SEP) should provide a contrast, as growth forecasts will be revised higher.  In June, the change in Real GDP was raised from March, from 0.4 to 1.0 for 2023.  The projection for 2024 was lowered by 0.1 to 1.1%.  The first two quarters of 2023 printed 2.0 and 2.1, and the Atlanta Fed GDP Now is 4.9% for Q3 and 2.9% Blue Chip consensus.  So 2023 will have to be raised, and 2024 is likely to see a bump up as well.  The FF rate projections in June were revised up to 5.6% in 2023 from 5.1 in March, and 4.6% for 2024, from 4.3. 

Interestingly, the SFRZ3/SFRZ4 one-year calendar spread settled Friday at -97.0 (9455.0/9552.0) almost exactly in synch with the Fed’s SEP, which indicates 100 bps of cuts in 2024.  However, if growth projections are raised, then it’s also probable that the 2024 FF forecast will be ratcheted up from 4.6%.  Indeed, SFRZ4 posted a new contract low settle on Friday of 9552.0 or 4.48%.  (New low settles as well in SFRM4 at 9487.0, U4 at 9518.5, and H5 at 9580.5.  SFRM5 didn’t quite settle at a new low, but the price is 9600, exactly at 4%). On new contract lows, open interest in the above-mentioned contracts marginally declined with U4 falling 13k.  In my opinion, this part of the curve is not seeing new panicky hedges; price action is more indicative of a shoulder tap to lighten up on longs going into a meeting where Powell is likely to emphasize higher for longer.

There was heavy buying Friday of SFRZ3/H4 3-month calendar spread, about 125k, reflecting the same sort of sentiment.  The spread settled at a new high for the year at -10 (9455/9465) but open interest fell small in both contracts, -7k and -9.8k.  In early May this spread had settled at a low of -56 post-SVB, on the idea that financial stress would spark aggressive Fed cuts.  Those perceived cuts have obviously been squeezed significantly lower.  For all the recurrent talk about the Fed losing credibility, here’s an instance where Powell showed a steady hand in guiding expectations away from knee-jerk easing.  If there’s a loss of credibility, it’s with the Federal Gov’t budget, and long yields pressing against new highs are an obvious marker. 30y yield ended 4.41%, just slightly lower than the year’s high, posted in August at 4.45%

The spread between SFRU4 and ERU4 is making new highs near 1.25% (9642.5/9518.5).  EURUSD has slipped from 112 to 106.5 since July as the forward interest rate differential widened.  At the same time, USD vs JPY made a new high for the year this week at 147.85 and likely would have done the same against the renminbi if not for strong verbal intervention by the PBOC on Monday. 

USD strength translates into tighter financial conditions, as does higher rates at both the short and long end.  Another signal is credit spreads.  On that score, here’s a clip from El-Erian’s Friday interview on BBG:

“If you look at high yield, if you look at commercial real estate, there’s massive refinancing needs next year.  Massive… There are things that have to be refinanced in this economy that cannot be refinanced in an orderly fashion at these rates.”

From another BBG article,  “This week Moody’s said the default rate for speculative-grade companies worldwide is expected to hit 5.1% next year, up from 3.8% in the 12 months ended in June.  Under the most pessimistic scenario, it could jump as high as 13.7% – exceeding the level reached during the 2008/09 credit crash.”

Everyone knows that the markets have priced easing but that those expectations have been pounded lower since May.  There has recently been more commentary about self-sustaining elements of higher inflation, noting for example that net interest expense for households and corporates has declined on balance, leading some to call for significantly higher rates.  My view is that the Fed is done or almost done, but will attempt to hold out against cuts as long as possible.  The topic of the Federal Gov’t’s unsustainable spending will likely come up at the press conference, and it will be interesting to see whether Powell is more expansive in outlining some of the issues or will simply give the boilerplate response of the Fed staying in its lane.

One last note relating to financial conditions and unanticipated snaps.  Fifteen years ago we had Lehman in Sept 2008.  Twenty-five years ago, the Russian default contributed to the demise of LTCM in Sept 1998. On the long term chart of the 2y yield, this area from 5 to 5.5% seems to be a level associated with potential stress.  By contrast, the ten year yield isn’t there yet.  Let’s see how the 20-year auction is absorbed on Tuesday…

Two-year above, ten-year below.

OTHER THOUGHTS/ TRADES

I skate to where the puck is going to be, not where it has been.  -Wayne Gretzky

One interesting trade last week was a buyer of SFRZ3 9468.75/9493.75/9518.75 call fly for 0.75.  The low strike is 5.3125% which compares to current Fed Effective of 5.33.  If the Fed does NOT hike again this year, and the market perceives an ease at the first meeting of 2024 on Jan 31, then SFRZ3 will likely close between the bottom and middle strikes.  Note that SFRU3 settled 9460.75 Friday.  What happens on no ease in Sept and Nov, but a 50bp cut in Dec?  That scenario would entail some pretty bad things occurring, and the market would likely price additional cuts in the beginning of 2024, which could cause SFRZ3 to blow through the upper strike.  Low probability.  Dec FOMC is 13^th, while the options expire on the 15^th.

The 4% call strike has been popular buy in both March’24 and now June’24, with 9600/9700 call spreads trading in good size.  Last week it was June, paying around 9 bps.  In SFRH4 the 9600c settled 6.0 with 285k open and the 9700c at 3.25 with 258k open (ref 9465s).  In SFRM4  the 9600c settled 13.5 and the 9700c 5.75 with OI 152k and 189k.  So the call spread settled 7.75 ref 9487s.  The March call spread was also originally purchased over 10 bps.  Both of these buys are obviously under water, but the idea that the Fed may have to reverse some of the 500 bps of tightening by Q2 is clearly possible.

	9/8/2023	9/15/2023	chg
UST 2Y	498.0	503.5	5.5
UST 5Y	439.4	445.3	5.9
UST 10Y	425.7	432.2	6.5
UST 30Y	433.2	441.2	8.0
GERM 2Y	308.1	321.5	13.4
GERM 10Y	261.0	267.5	6.5
JPN 20Y	139.7	142.8	3.1
CHINA 10Y	266.7	266.8	0.1
SOFR Z3/Z4	-108.0	-97.0	11.0
SOFR Z4/Z5	-59.0	-63.5	-4.5
SOFR Z5/Z6	-6.0	-9.0	-3.0
EUR	107.03	106.60	-0.43
CRUDE (CLX3)	86.81	90.02	3.21
SPX	4457.49	4450.32	-7.17	-0.2%
VIX	13.84	13.79	-0.05

https://blinks.bloomberg.com/news/stories/RY1ZJ5DWLU68

*****************************************************************
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No Country for Old Men

September 15, 2023

You always pay too much. Particularly for promises. There aint no such thing as a bargain promise.
from the novel, No Country for Old Men

–I had seen on Wednesday that President Biden was scheduled to give an economic speech on Thursday.  I skim a decent amount of news in the morning, and I really didn’t see anything mentioned about it today.  I did find and watch the speech this morning.  No real depth in Biden’s comments, though he did mention that unemployment has been under 4% for a record stretch of 19 months [amazing], and also asserted it takes sophisticated tax examiners to go through a trillion dollar income (huh?). 

–The dominant news stories this morning are the removal/disappearance of the Chinese Defense Minister and the US Autoworkers strike.  

–In terms of prices that aren’t a bargain, it’s not just promises.  Live Cattle is exploding higher. Uranium making new recent highs (chart attached).  And of course, WTI is making new highs with CLV3 over $90/bbl.  Both inflationary… and a tax on consumers.  In any case, ECB hiked yesterday, perhaps for the last time, as Lagarde said inflation has been too high for too long.  She also emphasized lower forward growth estimates going forward.  Sounds stagflationary.

–In the US the SOFR curve inverted further.  SFRU4 and Z4 made new contract low settlements at 9523 (-4.5) and 9556.5 (-5.0).  I’ve attached a chart of red/green pack spread which closed at a new recent low of -53.25, a reflection of the higher for longer theme.  Longest inversion ever.  Tens and thirties were both up about 4 bps yesterday to 4.286% and 4.383%.  This morning treasury futures are lower.  From settles of 109-24 and 119-02, currently TYZ is 109-18 and USZ is 118-18.  There has been a lot of concern about high deficits and debt supply, and news like this doesn’t help:  “the Biden administration is preparing to offer emergency economic aid to auto suppliers to protect them from any long-term damage in the event of a prolonged strike…”  

–Industrial Production today, but equity option expiration today could be the most important aspect of today’s action.  From BBG:

A $4 Trillion ‘Triple Witching’ Event Endangers Stock Market Calm

Shunning bonds

September 14, 2023

–Yields edged lower as the brief sell off after the inflation report was absorbed.  CPI 3.7 vs 3.6 expected, Core 4.3, as forecast.  Tens fell 1.7 bps to 4.245%.  SOFR contracts up 2 to 3 from U4 back.  Vol a bit lower in the wake of CPI.  TYZ3 110^ 2’35 from 2’40 on Tuesday.  

–Today brings Retail Sales, expected 0.1 m/m vs 0.7 last. Ex-auto/gas expected -0.1 vs +1.0 last.  PPI 1.3 yoy vs 0.8 last; ex-food and energy 2.2 vs 2.4 last.  Jobless Claims 225k.  

–Thirty year bond auction tailed by about 1 bp, going off at 4.345%.  Bloomberg headline this morning: ‘Ray Dalio says he doesn’t want to hold bonds, cash “is good”.  From the article, “We’re seeing that dynamic happen now [central banks may have to step in]”, Dalio said. “I personally believe that the bonds, longer term, are not a good investment.”  Pimco’s Ivascyn also said yesterday that debt levels and deficits are a concern, and that he has added to positions in inflation-linked bonds.  While countless observers have warned about unsustainable debt metrics, I get the feeling that these subtle warnings from huge stewards of capital carry more weight.

CPI day

September 13, 2023

–Curve flatter yesterday with 2yr note up 1.6 bps to 5.002 and 10y down 2 bps to 4.262.  On the SOFR curve reds -3, greens -1.25 but blues UP 0.875 and golds +2.75.

–Big release of the day is CPI, expected to show yoy headline increase to 3.6% from 3.2 last.  Core expected to drop from 4.7 last to 4.3%. FFX3 settled 9456.5, still indicating around 50/50 odds of a 25 bp hike at the Nov 1 FOMC.

–30y auction today as well.  USZ3 currently on the lows of the past six sessions, trading 118-28 this morning vs 119-14 settle on Tuesday.

–Yesterday a buyer of 40k SFRM4 9600/9700cs for 9.0/9.25, settled 9 vs 9492.5.  Previously there had been large buying of the same strike call spread in March at around the same premium (9 to 13), though that cs now settled at 4.0 vs 9468 (both strikes have over 260k open interest).  This player typically comes in before large data points. 

–With midcurve September options expiring Friday, 0QU3 9525^ settled 15.0 with SFRU4 almost exactly at strike at 9525.5.  Wide breakeven 9540 to 9510 for just three days, though yesterday’s settle in U4 is a new contract low.  

–Mood of the market is that rate hikes are probably done, but there is concern that the Fed may feel compelled to raise if inflation perks up again.  Therefore the curve is under pressure, but long end yields are weighed by supply.

–Escalation in Ukraine/Russia with an attack on Sevastopol port just in front of Putin/Kim Jong Un meeting.  Wheat responded with a small uptick to near $6 (W Z3) but the contract had been 7.50 in mid-August. 

From the Daily Mail a couple of hours ago…

• Blistering strikes saw up to seven huge explosions hit a naval port in Sevastopol
• The black sea city is strategically important to Russia, which annexed Crimea from Ukraine in 2014. Kyiv has stated its intention to liberate the peninsula

• ABOUT:
  Former member of the CME specializing in interest rate options and yield curve strategies.

  The risk of loss in trading futures and/or options is substantial and each investor and/or trader must consider whether this is a suitable investment. Past performance, whether actual or indicated by simulated historical tests of strategies, is not indicative of future results.