Higher for longer sparks creative incentives
August 28, 2023
–Higher for longer theme in the wake of Powell’s comments. New high SFRU3/U4 -75, up 4 on the day and up from -177 from May 11. SFRZ3/Z4 settled -113.5, also a new recent high.
–Vol hit as futures trading was rather subdued in rates post-Powell. For example, on Thursday TYV 110^ settled 1’55 vs 110-015. On Friday it settled 1’45 vs 109-295 (7.2).
–A fair amount of call buying in SOFR…SFRZ3 9475/9487.5cs paid 1 for 40k… 125k between Thursday and Friday. Z3 9468.75/9481.25/9493.75c fly 0.5 paid 40k. SFRM4 9600/9700cs 9.5 paid 15k and 9700/9750cs 3 to 3.125 (synth) paid for 40k (adding).
–Dallas Fed on Monday, expected -19 from -20.
–Various steps to support markets are becoming more prevalent. In China the MOF halved the stamp duty on securities transactions to 0.05%. Chinese stocks exploded but have fizzled from the highs. USDCNY is near 7.30 with the yuan showing continued signs of weakness (High last November 7.327). In the US, Zillow’s wizards introduced a 1% downpayment program for first time buyers.
The Price is … Uncertain
August 27, 2023 – Weekly Comment
**************************************
Bob Barker, host of the legendary game show ‘The Price is Right’ passed away at 99 this weekend. He seems to have identified a winning formula, subtly alluded to in the picture below. He was confident of the price and of the strategy.
In the classic 1979 movie The In-Laws, there’s a scene with Vince Ricardo (Peter Falk) in a dive bar with a cab driver. The Price is Right playing on TV. The dialogue captures the essence of the program.
Vince: What is this show?
Cab driver: Are you kiddin’ man? It’s The Price is Right. This is the all-American game show
Vince: And they’re supposed to guess what all that crap is worth? Is that the principle?
Cabbie: right
Vince: How long has this show been on the air?
Cabbie: Since about 1911
https://www.youtube.com/watch?v=p5FO9-3nXvg
Our Fed Chairman, Jerome Powell, is a bit less confident in the price, but maybe that’s because he doesn’t have the same sort of back-up as Bob. Can hardly blame him. From his speech:
We see the current stance of policy as restrictive, putting downward pressure on economic activity, hiring, and inflation. But we cannot identify with certainty the neutral rate of interest, and thus there is always uncertainty about the precise level of monetary policy restraint.
For Powell, it’s not just the ‘price’. It’s the change in price. He talks about breaking down core PCE inflation into three parts: “inflation for goods, for housing services, and for all other services, sometimes referred to as nonhousing services.” Not really new, but for me, the takeaway is that rates are likely high enough with respect to the FF target, and now we need to let the passage of time do its work, and we absolutely need to see the labor market weaken further. For a while there, the Unemployment Report was relatively unimportant. It’s moving to center stage once again.
Powell notes that:
Core goods inflation has fallen sharply, particularly for durable goods, as both tighter monetary policy and the slow unwinding of supply and demand dislocations are bringing it down.
Mission accomplished on this bucket.
On the interest-rate sensitive housing sector, there has been progress, but time needs to elapse:
The slowing growth in rents for new leases over roughly the past year can be thought of as “in the pipeline” and will affect measured housing services inflation over the coming year.
The Fed knows this will take some time for all the reasons that have been described by analysts. However, the confidence level for being on the right track appears high.
The final category, nonhousing services, accounts for over half of the core PCE index and includes a broad range of services, such as health care, food services, transportation, and accommodations. Twelve-month inflation in this sector has moved sideways since liftoff.
Here is where the labor market comes in:
Production of these services is also relatively labor intensive, and the labor market remains tight. Given the size of this sector, some further progress here will be essential to restoring price stability.
On Friday, the Employment report is released, expected 170k with the rate at 3.5%. Anecdotal reports indicate softening in the labor markets, for example GM just announced it’s shuttering an IT innovation center in Arizona, costing 940 jobs.
Where Powell IS clear and certain is here:
Two percent is and will remain our inflation target. We are committed to achieving and sustaining a stance of monetary policy that is sufficiently restrictive to bring inflation down to that level over time.
Speaking of time, it’s worth a mention that the BBG Subdial [luxury] Watch Index is -10.8% in the last 24 months, down 14.2% in the last 12 months.
https://subdial.com/market
Lower end consumers are also being squeezed. From CNN Business, “…new credit card and auto loan delinquencies have now surpassed pre-Covid levels, according to Moody’s Investors Service.” Powell mentioned more stringent credit as well, saying “…bank lending standards have tightened and loan growth has slowed sharply.”
In terms of market pricing, shorter maturities are at new highs for the cycle. The 2y note ended the week at 5.06%, up 11 bps from last Friday. Fives gained nearly 10 bps to 4.44%. While the 2y note is fairly close to the high from June 2006 (5.28%) which was the end of the 2004/06 hike cycle, longer maturities aren’t testing 2006 highs. For example, the 5yr in June ’06 was 5.23% vs 4.44% now, and 10s were 5.22% vs 4.29% now. The curve actually flattened somewhat this week, with the 10y yield down 4 bps to 4.24% and the 30y -8.4 to 4.293%.
One place where long yields have significantly exceeded the highs from 2006 through 2008 is the 30y Mortgage. The high in the Bankrate 30y mortgage was 6.4% in 2006 and 6.5% in 2008, now it’s 7.6%.
On the SOFR curve, the pullback in one-year forward contracts since the banking turmoil of mid-March (really since early May) has been absolutely astounding. For example, SFRZ4 settled Friday at 9564.5. The contract low was set on Tuesday at 9564. The high settle in the past year was May 4 at 9734.5. A decline of 170 bps!
This week the Green SOFR pack (3rd year forward) posted a low of 9609 (ended Friday 9620), nearing the October 2022 low of 9604. The blue pack (4th year) made a new low at 9614 (Friday 9625). However, the red pack made a low of 9551 in October, a new low of 9544 in early March, and 9571 this past week.
Since early June the Z3/Z4 spread has rallied from -161 to -113.5. For all the talk of the Fed having lost credibility, it’s interesting to note that the last dot plot in June had the end of 2023 FF projection at 5.6% and end of 2024 projection at 4.6%, a spread of -100 bps. The SOFR curve is in alignment, at least according to this particular spread. SFRZ3 settled 9451 or 5.49% and Z4 at 9564.5 or 4.355%. (FFF4/FFF5 settled -107, even closer).
Apart from Powell being steadfast in his quest for a 2% target, weakness in the front end was partially due to the continued supply of treasuries. On Monday the treasury auctions, 62b 6m bills, 69b 3m bills, 45b 2y notes and 46b 5yr notes. On Tuesday, 60b 42day CMB and 36b 7 year notes. On Thursday, PCE prices are expected 3.3% yoy, up from 3.0 last, with Core 4.2%, up from 4.1. Friday brings the Employment report and ISM Mfg.
OTHER THOUGHTS / TRADES
On Friday 0QV 9606.25/9637.5/9668.75 c fly traded for 2.25. Settled 1.75 ref SFRZ4 9564.5, but I’m pretty sure it would have been hard to buy 2s. Call flies like this make a lot of sense as a countertrend idea. Expiration is 13-October. Prior to expiry there are two employment reports, Friday and 6-Oct, two PCE prices, Thursday and 29-Sept, two CPI reports, 13-Sept and 12-Oct and of course, the Sept 20 FOMC. 0QV 9600/9650/9700 c fly settled 4,0. The 50% retrace from May’s high print of 9743 to Friday’s low 9558.5 is 9650.75.
There has been a decent amount of call spread buying in SFRZ3. For example, SFRZ3 9475/9487.5 bought 125k between Thursday and Friday for 1.25 to 1.0 (settled 1 ref 9451). Buyer of 25k SFRZ3 9468.75/9481.25/9493.75c fly for 0.5, settled there. Current EFFR is 5.33% essentially at the low strike of the fly. If the Fed holds fire for the rest of the year, this trade could easily play.
| 8/18/2023 | 8/25/2023 | chg | ||
| UST 2Y | 494.5 | 505.6 | 11.1 | wi 501.7 |
| UST 5Y | 438.7 | 448.5 | 9.8 | wi 441.7 |
| UST 10Y | 427.8 | 423.9 | -3.9 | |
| UST 30Y | 437.7 | 429.3 | -8.4 | |
| GERM 2Y | 305.9 | 303.5 | -2.4 | |
| GERM 10Y | 262.2 | 258.7 | -3.5 | |
| JPN 20Y | 134.9 | 139.0 | 4.1 | |
| CHINA 10Y | 256.0 | 256.7 | 0.7 | |
| SOFR Z3/Z4 | -114.5 | -113.5 | 1.0 | |
| SOFR Z4/Z5 | -43.0 | -55.0 | -12.0 | |
| SOFR Z5/Z6 | -5.0 | -6.0 | -1.0 | |
| EUR | 108.73 | 107.96 | -0.77 | |
| CRUDE (CLV3) | 80.66 | 79.83 | -0.83 | |
| SPX | 4369.71 | 4405.71 | 36.00 | 0.8% |
| VIX | 17.30 | 15.68 | -1.62 | |
The Jackson Hole Arena
August 25, 2023
–Powell today at Jackson Hole, starts at 10:00 EST.
–SFRU3/SFRZ3 settled at +1.0 (9456.5/9455.5). Buyer of 40k SFRZ3/H4 at -16.5, settled -16 (9455.5/9471.5) the high in this particular spread since October. Calendar spread buyers have a ‘higher for longer’ bias with respect to Jackson Hole and Powell. That is, if the Fed maintains, Z3/H4 should roll to where U3/Z3 is now.
–Price action in general yesterday was slanted toward a hawkish Powell. SFRU4 was the weakest contract on the strip was down 10.5, but greens thru golds only -3 to -2. 2y yield +6.4 to 5.016% while tens rose 3.7 to 4.233%.
–FFX3 settled at a new low of 9454.5, down 2 on the day and the lowest level since early March. The intervening high in March (post SVB) was 9610.5. So that’s over 150 bp round trip…yet banks are still being negatively impacted by the inverted treasury curve with depositors lured by t-bills and a 2yr note yielding just over 5%. FFX3 at 5.455% is exactly 12.5 bps above the current Fed Effective of 5.33%, i.e. a 50/50 chance for a 25 bp hike at one of the next two meetings.
–Buyer of 100k SFRZ3 9475/9487.5cs mostly 1.25 and just above. Settled 9.0 and 7.75 vs 9455.5. Requires an ease to fill out. Perhaps more interesting, a buyer of 10k SFRZ3 9437.5/9500 c 1×3 for 2.5. The lower strike is currently in-the-money by 18. SFRZ3 9500c settled 7.0. Risk is another blow-up like March.
–Big outside reversal days in ESU and NQU, a rather negative development coming on the heels of NVDA’s blow-out earnings and guidance. SPX -1.3% and Nasdaq -1.9%.
–Saw a good Robt Frost quote yesterday: “Half the world is composed of people who have something to say and can’t, and the other half who have nothing to say and keep on saying it.”
With that as an introduction, Chamath Palihapitiya was amusingly skewered on X for this tweet:
“I’m in the arena trying stuff. Some will work, some won’t. But always learning. You’re anonymous and afraid of your own shadow. Enjoy the sidelines.”
A lot of “I’m in the arena trying stuff” memes yesterday. Well, I am back in the arena today after a short break…
We’re now restrictive, but must hold until the job is done
August 24, 2023
–The Fed Effective rate is 5.33% or 9467.0. FFX3 (Nove Fed Funds) captures the next two FOMC meetings, Sept 20 and Nov 1, and remains pegged between 9456 and 9460. At yesterday’s settle of 9456.5, it’s close to 50/50 for another 25 bp hike at one of the next two meetings. FFX3 is the lowest contract on the FF strip. Going into Powell’s speech at Jackson Hole tomorrow, the market accepts the idea that rates are currently restrictive and are close to the final destination if not already there. The question has shifted to duration of restraint before the next easing cycle begins.
–FFX3/FFX4 settled at -97 bps (9456.5/9553.5) indicating nearly 1% of ease over that year. FFK4 (May) at 9488.5 or 5.115% is the first contract more than 25 bps above FFX3 (lower in yield), and is nearly ¼ pct below the current Fed Effective.
–At the last Jackson Hole conference, FF were 2.25 to 2.5% vs the current 5.25 to 5.5% target. Powell gave a short talk, outlining three lessons from the past. First, the central bank is responsible for price stability, and the Fed MUST return to its 2% target. Second, inflation expectations are a big part of the equation, so the Fed needs to make sure they remain moored to avoid a price/wage spiral. Third, the Fed must keep at it until the job is done.
–In my opinion, there is little chance of moving the inflation target. With the ten-yr inflation-indexed note yield near 2% and FF above all levels of inflation, it’s a matter of time and not level. Powell speaks at 10:00 tomorrow, with Lagarde making comments afterward.
–The curve flattened yesterday with a continued rally in longer maturities. Tens were down 13 bps to 4.196% and 30s down 12 bps to 4.281%. On the SOFR curve reds through golds (SFRU4 thru SFRM8) were up 12 to 15 bps. NVDA blew away estimates, leading to a huge after-hours bid in Nasdaq.
–News Thursday includes Jobless Claims expected 240k and Chgo Fed National Activity which has declined the past two months.
Financial Conditions Tighten
August 17, 2023
–Stocks and bonds sliding lower. SPX yesterday -0.8% and Nasdaq Comp -1.15%. Ten year yield +3.7 bps to 4.256%. SOFR contracts from June’24 to June’27 down 3 to 4 bps. As of this note, TYU trades 109-105, having settled 109-18 yesterday. On the front TY contract at the time, 109-115 was the lowest settle last October. This morning $/yen at new recent high 146.16 and $/cny at new high 7.3122 (right at the high of last November). There are reports of China selling dollars to stem the slide, which likely adds pressure on US treasuries. Interesting tweet from Althea Spinozzi (SaxoBank) notes that Japan’s 20y auction tailed the most since 1987, “showing that investors require a higher yield to buy JGBs. Rising JGB yields threaten bonds worldwide…”
–Today’s news includes Philly Fed, expected -10.2 from -13.5. Jobless Claims 240k.
–The big change is a fairly rapid tightening of financial conditions in the past two weeks or so. Dudley, the former president of NY Fed listed 5 factors for financial conditions, Short rates, long rates, value of the USD, stocks, corporate spreads. Long rates have taken out last year’s highs, DXY made a new low sub-100 in mid-July and is now 103.5, big tech has rolled, corporate bankruptcies rising. Tendencies are self-perpetuating.
–Below is a clip from the latest Atlanta Fed GDP Now, which simply plugs new data into the model, and spat out 5.8% for Q3 GDP estimate. Real …(REAL) gross private domestic investment increased to 11.4% and REAL personal consumption to 4.8%. Those values seem wildly high to me unless there is inventory hoarding going on.
The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the third quarter of 2023 is 5.8 percent on August 16, up from 5.0 percent on August 15. After this morning’s housing starts report from the US Census Bureau and industrial production report from the Federal Reserve Board of Governors, the nowcasts of third-quarter real personal consumption expenditures growth and third-quarter real gross private domestic investment growth increased from 4.4 percent and 8.8 percent, respectively, to 4.8 percent and 11.4 percent.
Strong sales but credit crumbling
August 16, 2023
–Retail Sales much stronger than expected at 0.7% and 1.0% ex-auto and gas (m/m). 10yr yield made new high, just eclipsing last October’s high close at 4.245, spiking to 4.268 post-data, but came back and marked at 4.219 at futures settlement time. Once again, near SOFR one-year calendars edge to new highs. SFRZ3/Z4 settled -116 (9460.5/9576.5) and H4/H5 settled -119.5 (9479.0/9598.5). The March spread is now the most inverted on the curve. It’s not that odds of a near-term change in FF are rising, (FFX3 remains in its 9457/9460 range), but perceptions of forward eases have been slightly pared back. Additionally, it feels as if there’s an element of forced selling weighing down longer maturities.
–Retail sales strong, Atlanta Fed GDP Now was raised to a sizzling estimate of 5% for Q3, however two tweets from Kobeissi Letter note deteriorating debt dynamics: “the % of credit card debt more than 30 days past due is up for six straight quarters” [from a very low base] And…”In the first 7 months of ’23 the US has seen an alarming 402 corporate bankruptcies. This is more than the entire 2022 total of 373.”
–Housing Starts and Industrial Production this morning followed by FOMC minutes in the afternoon. SPX made a new recent low yesterday afternoon -1.16%. China’s stocks remain under pressure
Bear Market in Rates
August 15, 2023
–Surprising weakness in front end/belly yesterday. In SOFR, red pack -8.5 (rate of 4.1625%) and green pack -5.75 (rate of 3.73%). In treasuries, 2y +6.8 bps to 4.961%, 5s +4.8 bps to 4.355%, 10s +1.8 to 4.182%. Selling has persisted overnight. Yesterday TYU3 settled 110-00 and last print (6:30 est) 109-23+. USU3 settled 120-22 and now 120-04. Below I have marked some old lows on the front contracts in TY and US for comparison. The lowest settle on front TY contract was 109-11+ and low settle on front US contract was 118-10. DV01 on TYU ~ $65 and on US $138, so approx 15.3 bps per point on TY and 7.2 bps per point US.
–New highs in several of the near 1-yr SOFR calendars as reds were pasted. U3/U4 settled -86.25. +8.75. Z3/Z3 -118, +6.0 and H4/H5 -122 (now the lowest 1-y spread on the strip) +1.5
–Russia raised rates 350 bps to 12% to support the ruble, while China cut rates in an effort to shore up activity. USDCNY is close to a test of last November’s high of 7.3274. The negative vibe of high unemployment among China’s youth has also been reversed – by suspending publication of that particular data series. There. Problem solved.
–New block trade in SOFR options. 20k SFRH4 9487.5/9537.5cs sold (settled 10.5 ref 9477.5) vs SFRM5 9600/9650cs bot (settled 17 ref 9614) paid 7.75. A hard rally in near contracts will not be a help for this trade.
Low ticks on front TY contract:
108-26+ 21-Oct
109-31+ 02-March
109-240 04-Aug
109-280 yesterday
LOW SETTLE 109-11+ on 20-Oct
Cash yield at futures settle 418.2. High yield October 4.245
Low ticks on front US contract:
117-19 24-Oct
121-27 02-March
119-25 04-Aug
120-06 yesterday
LOW SETTLE 118-10 24-Oct
Cash yield at futures settle 427.9. High yield October 438.0
If you’re renting from Blackrock and can’t make the payments, but the guy across town owns his home outright, how many 0DTE options should you buy?
August 14, 2023
–Continued slide in TY and US futures Friday. 10y yield +8.6 bps to 4.164% and 30s +3.4 bps to 4.27%.
–On the SOFR curve the pivot point had been reds (rally the hardest, sell off fastest) and in turn the red midcurve straddles had been more expensive. However, given weakness in the greens and blues, nominal straddle prices are now all fairly close:
0QU3 9550.0^ ref SFRU4 9554.5 is 35.5
2QU3 9625.0^ ref SFRU5 9621.0 is 37.0
3QU3 9637.5^ ref SFRU6 9637.5 is 38.0
Given the pricing inversion in futures, it probably makes 3QU calls relatively expensive.
–(Reuters) – Chinese property giant Country Garden’s debt problems deepened after its onshore bonds were suspended, sending its shares plunging 16% to a record low on Monday in a fresh blow to policymakers trying to shore up confidence in a stuttering economy.
–China’s property markets remain stressed as the quote above attests. Consider this contrasting US image: Homeowner’s Equity in Real Estate around 70%. But it was still relatively high in 2005/06 in the low 60s before the housing bust. Is the bulk of the population just renting? I’m not drawing conclusions from one chart but perhaps it points up the split in the economy when considered against the idea of credit card balances surpassing $1 trillion.
By the way, according to the last Fed Z.1 quarterly report, Home Mortgages were $12.5 trillion in Q1. The level during the GFC, Q1 2008 was $10.7 trillion. Up 17% in 15 YEARS.
Mid-August musings
August 13, 2023 – Weekly Comment
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I like to keep my issues strong
It’s always darkest before the dawn
–Florence and the Machine – Shake It Out
Feels like a shakeout might be coming. Of course, VIX and MOVE aren’t really reflecting it. Nothing happens in August until Jackson Hole right? Vol has a tendency to decline at this time of year. This summer VIX has been at its lowest levels since pre-covid. Last at 14.8. June low 12.9 and July high 15.4. MOVE is also at the low end of the past year’s range at 112. (Jackson Hole Aug 24-26)
Sometimes things do happen in August. From The Guardian, August 11, 2015
China stunned the world’s financial markets on Wednesday by devaluing its currency for a second consecutive day, triggering fears its economy is in worse shape than investors believed.
The move sent fresh shockwaves through global markets, pushing shares sharply lower and sending commodity prices further into reverse as traders feared the move could also ignite a currency war that would destabilise the world economy.
At that time CNY was 6.21 (8/7/15). On 8/12 it reached 6.449 a decline in the value of the yuan of about 3.8%. Now it’s 7.24. The high on Nov 1, 2022 was 7.327 (high since 2007). It’s worth noting that in April of this year, CNY was around 6.87. Since then the yuan has declined by about 5.3% (to 7.24 now). The juggernaut economy of the past decade is seeing its currency crater as debt deflation and property woes smother growth. We’re not hearing much about China ‘exporting deflation’ this time around but certainly the effect is there at the margin.
Walter Bagehot, a British journalist and Editor of the Economist, wrote this in 1856.
“Much has been written about panics and manias, much more than with the most outstretched intellect we are able to follow or conceive, but one thing is certain, that at particular times a great deal of stupid people have a great deal of stupid money… At intervals, from causes which are not to the present purpose, the money of these people – the blind capital, as we call it, of the country – is particularly large and craving; it seeks for someone to devour it, and there is a “plethora”; it finds someone, and there is “speculation”; it is devoured, and there is a “panic.”
Today, we’d call it ‘F-you money’, shown to be plentiful in a world of zero rates coupled with covid-inspired fiscal stimulus. Resulting inflation set the table, but the bulk of that capital hasn’t yet been devoured.
In terms of government’s contribution to continuing inflation, the following snippet from the Senior Citizen’s League shows surprising restraint. Following last week’s CPI:
“The Social Security cost of living adjustment for 2024 is looking increasingly like it may be around 3%…
A COLA of 3% would raise an average monthly benefit of $1789 by $53.70.”
Last year’s adjustment was 8.7%.
SOFR CURVE
The current peak contract/lowest rate on the SOFR curve is Sept’26 at 9637.5 or 3.625%. The lowest/highest yield contract is SFRU’23 at 9459.5 or 5.405%, an inversion of -178 bps. The low of the year for any contract has been Z3 at 9446.5, a rate just above the current high end of the FF target (5.25-5.5%). In early May, in the aftermath of the banking turmoil, the highest settlements for any contract came on 4-May, SFRH5 9739.5, M5 9739.0 and U5 9738.0; rates around 2.6%. Therefore, since then, the highest contract is about 100 bps lower than it was in May. In fact, at 9636.5 (3.365%) the blue SOFR pack (U6, Z6, H7, M7) is at the low settlement of this calendar year.
The largest inversion between the lowest and highest contracts on the SOFR curve has been around 225 bps. Think about that absolute value for a second. Two and a quarter percent. Spreads almost never price the full extent of a hiking or easing cycle. (Low in 2/10 treasury spread was -109). As an illustration, the chart below shows the rolling spread between the 3rd quarterly SOFR contract, now SFRZ3 and the 9th, now SFRM5. This 18 month spread is now -160 (9461.5/9621.5). The low was -210.5 in January.
From the chart you can see that the high in this spread, in anticipation of the hiking cycle to come, traded a high of just over 125 bps. No where near the actual magnitude of the hikes (500 bps in about 18 months). When actual Fed action did start, this spread quickly inverted, pricing a not-so-soft landing. By January of this year blues were trading above 9700, or just below 3%.
In my opinion, the implication is that when actual easing begins, this spread could easily go positive again.
News this week includes Retail Sales on Tuesday, FOMC minutes on Wednesday, Philly Fed Thursday.
| 8/4/2023 | 8/11/2023 | chg | ||
| UST 2Y | 478.9 | 489.3 | 10.4 | |
| UST 5Y | 416.3 | 430.7 | 14.4 | |
| UST 10Y | 404.8 | 416.4 | 11.6 | |
| UST 30Y | 420.3 | 426.9 | 6.6 | |
| GERM 2Y | 301.4 | 303.8 | 2.4 | |
| GERM 10Y | 256.1 | 262.3 | 6.2 | |
| JPN 30Y | 160.9 | 154.3 | -6.6 | |
| CHINA 10Y | 265.7 | 265.0 | -0.7 | |
| SOFR U3/U4 | -108.0 | -95.0 | 13.0 | |
| SOFR U4/U5 | -77.5 | -73.5 | 4.0 | |
| SOFR U5/U6 | -8.5 | -9.5 | -1.0 | |
| EUR | 110.10 | 109.48 | -0.62 | |
| CRUDE (CLV3) | 82.27 | 82.57 | 0.30 | |
| SPX | 4478.03 | 4464.05 | -13.98 | -0.3% |
| VIX | 17.10 | 14.84 | -2.26 | |
Ticking Time Bombs
August 11, 2023
–Treasuries enjoyed a brief rally after inflation data came out slightly better than expected 3.2% yoy with Core 4.7% yoy. However, going into and especially coming out of the 30y auction there was nothing but selling pressure. Blame was laid at the foot of the gov’t budget statement…really no surprise it’s gushing red ink, but the Kobeissi letter notes just INTEREST in July was $73.3 billion and YTD interest is $726b. Big numbers.
https://www.fiscal.treasury.gov/files/reports-statements/mts/mts.pdf
–Just take a look at the most recent yoy Tax Receipts vs Outlays
Receipts / Outlays
May 22 389b 455b
May 23 307b 548b
June 22 461b 549b
June 23 418b 646b
July 22 269b 480b
July 23 276b 496b
In July tax receipts are finally slightly higher than in July 22, but in all cases, expenditures are higher yoy. By a lot.
No es bueno.
Of course, headlines splashed across the internet this morning are that Biden is calling the US budget deficit China a ticking time bomb. Perhaps true, but I’m not sure how constructive it is.
–In any case, 5s, 10s and 30s added 7.3, 7.3 and 6.3 bps in yield with 30s ending at 4.235 following the auction result at 4.189%. Ten yr ended 4.078%. SOFR curve steepened, with reds -5.5, greens -8.5 and blues -10.375. However implied vol was lower across the curve. For example TYU 111.5 atm straddle settled 1’27 Wednesday, was 1’22 pre-CPI and 1’19 immediately after, with the new atm 110.75^ settling 1’17.
–Today’s news includes PPI expected 0.2 m/m and 0.7 yoy. Core 2.3% from 2.4%. Oil benefit pretty much over as the range has been between 72 and 82 for the past year, and now at upper end.
