Loss of support for long-dated USD assets?
April 13, 2023
–CPI slightly lower than expected at +0.1 with yoy 5.0% vs expected 5.1 to 5.2. FOMC minutes contained this assessment: “…the staff’s projection at the time of the March meeting included a mild recession starting later this year, with a recovery over the subsequent two years.” As other reports have indicated, a lot depends on the severity of tightened credit conditions, “…particularly because historical recessions related to financial market problems tend to be more severe and persistent than average recessions.”
–Ten year tailed about 2 bps, awarded at 3.455% vs 3.435 pre-auction. 30y bond (being auctioned today) was up 3 bps in yield (at futures close) to 3.651% while the five year FELL just over 7 bps to 3.478%. Red SOFR pack led the way, settled +12.5 on the day. This might be conspiracy theory type stuff, but it feels to me like long-dated USD assets might be losing some of their sponsorship. DXY edging to new lows. I’m not talking about “Bud Light” loss of demand, just a slight erosion of support. 30y auction bears watching. I would also note that bund/US ten year spread edged to new recent tights. I charted SFRU4 to ERU4 as a spread and noted that SFRU4 was 70 bps higher in yield than ERU4 just before SVB, but the spread went to zero in early April. (Last Nov SFRU4 was 120 bps higher). Tightening of these spreads suggests less USD support going forward? “This brand is in decline…”
–On the other hand, treasury vol has completely erased the surge related to banking problems. TY vol spiked over 12 in mid-March, now back to 7.7. One month ago TYM 114.5 atm straddle was 4’33 or 11.0 and currently TYM 115.5 atm straddle is 2’31 or 7.7.
–Jobless Claims and PPI today. Claims expected 235k. PPI expected 0.0 with yoy 3.0 to 3.2 from 4.6 last. Worth noting that WTI contracts closed at new highs for this calendar year yesterday. CLK3 83.26, +1.73 and CLM3 83.09 +1.60. The one-year calendar spread CLM3/CLM4 also closed at a new high 7.61 (83.09/75.48)….tight supplies in the near-term?
–3m libor set yesterday just over 5.25%. The high immediately after the end of the 2004/2006 hiking cycle was in July 06 at 5.52. The next big flare-up was to 5.725% in Sept 2007 as financial and other stresses on the system ratcheted up. It was August 2007 when Jim Cramer had his famous “They know nothing!!!” rant related to the Fed.
Speaking of which, Fed officials, and Warren Buffett, keep saying banking deposits are ‘safe’. It they’re not guaranteed, they’re not absolutely safe.
–One trade worth highlighting in SFR, buying of May SOFR call trees. New position of about 60k SFRK3 9512.5/9525 call spreads bought, selling an additional otm call to finance.
SFRK3 9512.5/9525/9550 c tree, took 2.5 credit, 5k
SFRK3 9512.5/9525/9575 c tree, took 0.5 credit, 35k
SFRK3 9512.5/9525/9587.5 c tree, paid 1 for 20k
Settles: SFRM3 9505.5
9512.5c 10.25
9525.0c 7.5
9550.0c 5.0
9575.0c 3.25
9587.5c 2.75
Works best with grinding rally over the next month, not a blow-up!
All about CPI today
April 12, 2023
–CPI today expected 5.1 to 5.2 yoy from 6.0 last. Core expected 5.5 to 5.6 from 5.6 last. Ten year auction. Fed minutes from March 22.
–Yesterday 2/10 pushed to a recent low of -62.2. with the 2y up 5.3 bps to 4.054 and tens +1.7 to 3.432. At the low on March 8 it was just under -108. After SVB, 2/10 rallied to -40 by March 24. Yesterday NY Fed’s Williams emphasized inflation and said another hike would be appropriate, but Austan Goolsbee, the new Chicago Fed President was much more circumspect:
“Today, I want to explain why I think that at moments like this, of financial stress, the right monetary approach calls for prudence and patience—for assessing the potential impact of financial stress on the real economy.
The reason to include financial conditions in our monetary policy discussion is that history has taught us that moments of financial stress, even if they don’t escalate into crises, can mean tighter credit conditions. These can have a material impact on the real economy in a way that the Fed absolutely needs to take into account when setting policy.”
–The market continues to lean toward another 25 bp hike at the May 3 meeting. (FFK3 9501s vs current EFFR 483 or 9517). There are many indications that banking sector stress is being discounted. For example, in the immediate aftermath of SVB, near atm straddles in SOFR actually traded at higher nominal premiums than red midcurves with the same expiration dates. I just chose March 14 as a comparison date, when atm SFRM3 9537.5^ was 93 while 0QM3 9625^ was 96. (June’23 had previously traded higher). SFRU3 9562.5^ was 121.5 with atm 0QU3 9650^ 116.5. These relationships are now reverting to more normal levels: SFRM3 9500^ is 33, fully 40 bps below 0QM3 9650^ at 73.0. However, SFRZ3 9562.5^ is still nominally above 0QZ3 9687.5^, 108 compared to 104.5. My interpretation is that immediate panic has subsided, but the situation is fluid going into year-end.
–Major banks report on Friday and it will be interesting to hear comments on recent turmoil. JPM, C, PNC, WFC, BLK.
–This last part is about Walmart’s decision to close 4 stores in Chicago… immediately after the election of Brandon Johnson as mayor.
The simplest explanation is that collectively our Chicago stores have not been profitable since we opened the first one nearly 17 years ago – these stores lose tens of millions of dollars a year, and their annual losses nearly doubled in just the last five years. The remaining four Chicago stores continue to face the same business difficulties, but we think this decision gives us the best chance to help keep them open and serving the community.
https://corporate.walmart.com/newsroom/2023/04/11/walmart-announces-closure-of-four-chicago-stores
Losses nearly doubled in the last 5 years! (Lori Lightfoot/Kim Foxx). The press release doesn’t mention loss due to repeated theft, but in December, WMT CEO Doug McMillon told Squawk Box that as a result of shoplifting, higher prices and closed stores could occur. “Theft is an issue. It’s higher than what it has historically been.”
Again from the WMT press release,
Community and city leaders have been open and supportive as we met with them over the years to share these challenges. As we looked for solutions, it became even more clear that for these stores, there was nothing leaders could do to help get us to the point where they would be profitable.
I don’t know about you, but to me, that sounds an awful lot like a big F you. Welcome to the top job Mayor Johnson.
Rates more ‘normal’ but bids in BTC and prec metals signal trepidation
April 11, 2022
–Another slight new low in SFRU3/U4 at -153.5, down 1 on the day (9530.5/9684.0). TYM3 settled -9 from Friday’s settle at 115-165, but is regaining part of that small loss today, trading 115-22+.
–FHLB only issued $37 billion in debt in the last week a March, hailed as a sign the banking crisis is abating ($304 billion issued 2 weeks earlier). On the other hand, BKX (banking index) is trading sideways at 81, having lost 25% of its value since the beginning of March.
–Implied vol coming out of the front end as forward easing prospects are shaved. Examples: On April 5 last week, SFRZ3 settled 9602 with 9600^ 123.5 and SFRH4 settled 9647.5 with 9650^ 139.0. Yesterday SFRZ3 settled 9567.5 and the 9562.5^ was 108, while H4 settled 9614 and the straddle was 128.0. Option markets have also tightened in terms of bid/ask spreads. Perhaps everything is starting to get a bit more normal? Not so fast…bitcoin at a new high over 30k. Gold (GCM3) is 2019 this morning, moving towards last week’s high, and silver is 25.17 (SIK3) testing new highs for the move.
–Three year auction today, followed by 10s, 30s, Wednesday and Thursday. CPI and Fed minutes tomorrow.
“Recessionary false alarm” ???
April 10, 2023
–A BBG story this morning proclaims, “Bond Market is Overplaying the Risk of a Deep Recession”. Part of the article cites the relative calm in VIX vs MOVE. “Explaining the divide has become a Wall St obsession – an urgent one, given the sway treasuries hold in models designed to divine the future of inflation and Fed policy. One concern is whether things having nothing to do with the economy – bearish positioning among speculators, specifically – made the big drop in yields a recessionary false alarm.”
–After the Feb 1 FOMC and its focus on inflation, followed by the monster Feb 3 NFP, with a higher than expected CPI on Feb 14, it’s no surprise that positioning leaned heavily to the bearish side. While the March short-cover reaction to the failure of SVB was spectacular, many interest rate futures contracts have settled right back around the levels they were in late Jan. The primary signal remains the deeply inverted one-year calendar spreads in SOFR, which are forecasting ease based on an economy vulnerable to rapid deterioration. At least that’s MY primary signal. (SFRM3/M4 -152.5, SFRU3/U4 -152.5, SFRZ3/Z4 -133.0).
–Friday’s employment data however, with NFP +236k, did not reflect immediate fallout from the bank failures. SFRZ3 led the way lower, dropping 19.5 bps to 9571.0 or 4.29%. That level is still quite a bit lower than the current 4.83% Fed Effective. Curve inverted further Friday: Reds -17, greens -12.5, blues -9.375 and golds -8.0.
–Plenty of news this week. 3, 10 and 30yr auctions. CPI Wednesday expected 5.1% from 6.0%, followed by Fed minutes from the March 22 meeting. PPI Thursday, Retail Sales Friday.
Curveballs
April 9, 2023- Weekly Comment
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An article on Reuters from Thursday is headlined, ‘Powell’s curve’ plunges to new lows, flashing US recession warning. The spread is that of the yield on current 3m bills vs 18 months forward.
From the article:
“Powell’s curve … continues to plunge to fresh century lows,” Citi rates strategists William O’Donnell and Edward Acton said in a note on Thursday. Refinitiv data showed the curve was the most inverted since at least 2007. [now -170 bps]
Of course, the simplest thing has always been to just look at the Eurodollar futures curve. I thought I would take this one last opportunity to actually print the ED spread, first to seventh quarterly contracts, currently June’23 to Dec’24. (spread in lower panel)
Above is a link to the Reuters article. The original Fed paper was from August 2018. Below is the abstract, emphasis added:
The spread between the yield on a 10-year Treasury note and the yield on a shorter maturity security, such as a 2-year Treasury note, is commonly used as an indicator for predicting U.S. recessions. We show that such “long-term spreads” are statistically dominated in models that predict recessions or GDP growth by an economically more intuitive alternative, a “near-term forward spread.” The latter can be interpreted as a measure of the market’s expectations for the near-term trajectory of conventional monetary policy rates. Its predictive power suggests that, when market participants expected—and priced in—a monetary policy easing over the subsequent year and a half, a recession was quite likely in the offing. We also find that the near-term spread predicts four-quarter GDP growth with greater accuracy than survey consensus forecasts and that it has substantial predictive power for stock returns. Yields on bonds maturing beyond 6-8 quarters are shown to have no added value for forecasting either recessions, GDP growth, or stock returns.
The euro$ and SOFR corves have been inverted for quite some time. The pictured spread has been consistently inverted since Sept 2022. ED =-205.5 while SFRM3/Z4 = -198.5. The extra 7 bps in dollars reflects a small credit aspect embedded in EDM3, and likely strengthens the ‘predictive power’ of the spread.
OK. I know it, you know it, and Powell knows it. The market has been pricing ease while Fed officials have been jawboning against any near-term rate cuts, even though the Fed dots for end of 2023 to end of 2024 indicate 75 bps of easing. As a friend likes to say, “How ya left?”
Jim Bianco posted this amusing synopsis on twitter:
Market narratives so far in 2023
Jan = Soft landing
Feb = No Landing
Mar = Hard Landing
How’s it left for April? Well, Friday’s employment data were slightly better than expected, with NFP 236k and a rate of 3.5%. Avg Hourly Earnings fell to a rate of 4.2% from 4.6% last. The odds of a 25 bp hike in May rose to nearly 70% with FFK3 settling 9501.5.
SFRZ3 settled Friday at 9571.0. -19.5 on the day but +1 on the week. SFRZ4 settled 9704.0, -16.5 on the day but +16.5 on the week.
SFRU3/U4 one-year calendar settled at a new recent low -152.5 (9535.0/9687.5), more than erasing the March rally associated with the failure of SVB. The range in SFRU3/U4 in March was -148.5 to -62. The low for the cycle was set in Jan at -177. Maybe a less-hard landing?
Here are just a few news snippets regarding recent and upcoming events:
(BBG) – US bank lending contracted by the most on record in the last two weeks of March, indicating a tightening of credit conditions in the wake of several high-profile bank collapses that risks damaging the economy. [fell $104b]
Consumer credit for February was released Friday with revolving credit +5.0% SA annual rate, and non-revolving +3.4, both relatively low. It’s interesting to look at the published financing rates comparing 2022 to February 2023:
New Car, 60-month. 5.36% to 7.48%
New Car 72-month. 5.50% to 6.97%
Credit Cards:
All accounts 16.26% to 20.09%
Accts assessed interest 17.91% to 20.92%
Personal Loans 9.87% to 11.48%
This week kicks off earnings season.
(WSJ) First-quarter profits are projected to drop 6.8% from the same period a year earlier.
(Reuters) Analysts expect S&P 500 earnings to fall 5.2% in the first quarter from the year-ago period, I/B/E/S data from Refinitiv showed.
See? It’s already getting better.
Three, ten and thirty year auctions begin Tuesday.
CPI is released Wednesday, expected 5.2% from 6.0%. Core expected 5.5% from 5.5% last. FOMC minutes from the March 22 meeting are released Wednesday afternoon.
PPI on Thursday
Retail Sales Friday
TOKYO, April 9 (Reuters) – The Bank of Japan will likely modify or end its bond yield control policy due to increasing side-effects such as the hit to financial institutions’ profits, former deputy governor Hiroshi Nakaso told a newspaper interview published on Sunday.
Is sponsorship of massive borrowing needs by the US being eroded?
OTHER THOUGHTS / TRADES
A WSJ article notes, ‘Binance.US Struggles to Find Bank to Take Its Customers’ Cash’.
With the shuttering of Signature and Silvergate, the regulatory noose is closing. The CFTC last month sued Binance Holdings Ltd. From the article, “Binance.US and Binance say they are separately managed. But both have the same majority owner, crypto tycoon CZ…”
A failure of Binance would add to shockwaves from SVB.
The next three FOMC meetings are May 3, June 14 and July 26. There is no Fed meeting in August. FFN3/FFQ3 settled -9.5 (9502.5/9512.0). A rate change in July is worth about 4.8 bps in the price of FFN3. The market is targeting the July meeting for an ease (call it 50/50 for now). Of course, SFRM3/SFRU3 3-mo spread settled -29.5 (9505.5/9535.0) so it’s clear the market continues to price ease in Q3.
| 3/31/2023 | 4/6/2023 | chg | ||
| UST 2Y | 406.2 | 382.1 | -24.1 | |
| UST 5Y | 361.5 | 336.2 | -25.3 | |
| UST 10Y | 349.4 | 329.4 | -20.0 | wi 332.5 |
| UST 30Y | 369.2 | 354.0 | -15.2 | wi 354.5 |
| GERM 2Y | 268.3 | 255.4 | -12.9 | |
| GERM 10Y | 229.2 | 218.3 | -10.9 | |
| JPN 30Y | 124.2 | 130.0 | 5.8 | |
| CHINA 10Y | 285.8 | 286.4 | 0.6 | |
| SOFR M3/M4 | -131.0 | -158.5 | -27.5 | |
| SOFR M4/M5 | -57.5 | -53.0 | 4.5 | |
| SOFR M5/M6 | -5.5 | 1.5 | 7.0 | |
| EUR | 108.73 | 109.22 | 0.49 | |
| CRUDE (CLK3) | 75.67 | 80.70 | 5.03 | |
| SPX | 4109.31 | 4105.02 | -4.29 | -0.1% |
| VIX | 18.70 | 18.40 | -0.30 | |
NOTE: I used Thursday closes as treasuries didn’t trade on Friday
https://www.federalreserve.gov/econres/feds/the-near-term-forward-yield-spread-as-a-leading-indicator-a-less-distorted-mirror.htm
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THIS….was the Bud for me. Not anymore.
Short Session
April 7, 2023
–From Bullard presentation yesterday: “Continued appropriate macroprudential policy can contain financial stress, while appropriate monetary policy can continue to put downward pressure on inflation.”
–I would dispute the premise. Monetary policy does put downward pressure on inflation, but also puts upward pressure on financial stress, which regulations can’t control. The presentation is worth reviewing, linked below. A lot of charts showing that financial stress is already receding and that the labor market remains robust. He cites the 1994 experience with the tequila crisis, Orange County blow-up and later, LTCB, noting that they were not ultimately harbingers of poor economic performance. (1994 was another period of rapid rate increases). Of course, debt levels were much lower as macro percentages at that time.
–In any case, the SOFR curve reacted with further inversion; near term easing projections were pared back. SFRZ3 fell 11.5 to 9590.5 (which is still 100 bps below the Fed’s 2023 dot of 5.1%). SFRZ4 fell 5 to 9720.5. SFRZ5 was actually up 1 on the day to 9731.5. Two year treasury curve was +6 bps to 3.82%, rest of the curve nearly unchanged.
–NFP today expected 230k. YOY Average Hourly Earnings 4.3 from 4.6% last. Shortened session with close at 10:15 Chicago time. Settles are at 10:00 a.m. Not sure how much longer it will be appropriate to cite Chicago times, as it becomes more probable that the CME (and other businesses) move headquarters out of the city as the new mayor vows heavy new taxes to pay for social services.
Ignoring Bullard
April 6. 2023
— ISM service was 51.2 vs expected 54.4, with Employment index 51.3 vs 54.0 last. ADP was just 145k. The strong data releases from February are in the rearview mirror; markets have reversed those moves. Jobless Claims today expected 200k. NFP released on Friday’s abbreviated session. CPI on Wednesday.
–Bullard speaks today at 10:00. A couple of days ago he said the Fed must continue to hike to stop inflation. Here is the market response: SFRM3/Z3 fell another 5.5 bps to a new low of -79.5 (9522.5/9602.0), a rough proxy for the amount of EASING being priced in the second half of this year. FFN3/FFF4 settled -80. Treasury yields continued to break lower, with 5s and 10s at their lowest levels since last September. At futures settle I marked 3.342% and 3.283%.
–Hey Bullard…you gonna let them talk to you that way? Because they’re saying you have no idea what you’re talking about.
–Midcurve April SOFR options expire one week from Friday. 0QJ3 9687.5^ settled 35.5 ref SFRM4 9685.0. The put settled 19.0. Seems like rather expensive premium. On the other hand, on 3/31 the low in SFRM4 was 9629. On March 8 the low was over 150 lower than now, at 9521. By contrast, further back on the curve, 3QJ3 9725^ settled at just 22.0 ref SFRM4 9726.5. If the Fed is closer to a pivot, the curve is likely to pivot as well, with back-end yields rising as flatteners are exited. Long put spreads on blues make sense in that sort of scenario.
April 5, 2023
–JOLTs sub-10m sparked a stunning SOFR rally. SFRH4 and M4 led the way, both +20.5 to 9638.5 and 9677. On March 30 the 2y yield was just over 4.12%, ending yesterday at 3.82%; a drop of 30 bps in three days, after Bullard just told us short rates need to be over 5%. May FF settled 9507, just slightly favoring the ‘no hike’ camp. April FF settled 9518.25, just a small premium to the current EFFR of 483. However, Aug FF rallied 14 yesterday to 9527.5 or 472.5, indicating an ease could occur as soon as the June 14 or July 26 FOMC.
–ISM Services today expected 54.5 vs 55.1 last. Two things have been stressed by Powell: one is the number of job openings per available worker, i.e. JOLTs, which fell yesterday. The other is strength in service sector pricing, as disinflation has been cited in both goods and housing rentals. Today’s release could figure bigly! ADP is expected 210k. Then we get the employment report on Friday’s shortened illiquid session. What could go wrong?
–This past weekend I posted the Gundlach indicator copper/gold ratio vs the 10y yield. Decent timing as gold vaulted to a new recent high, with GCM3 2039 late, +38.60. May Silver +1.08 to 25.10, new high for the year.
–On March 27, the CFTC released a notice of civil enforcement against CZ and Binance. Doomsberg highlighted some of the issues yesterday. This topic may carry a bit more weight given the war against crypto, as evidenced by the shuttering of Signature Bank.
https://www.cftc.gov/PressRoom/PressReleases/8680-23
The CFTC action hasn’t dented the price of bitcoin, which this morning is near its recent high at 28.7k. Bitcoin supporters appear to be more worried about the financial architecture of the world than the CFTC, as USD dominance is eroded. Worth noting that Chas Schwab closed at a new low settle of 50 (down 3% though not quite at the month’s low print of 45). A friend (thanks Joe) mentioned that Canada’s Toronto Dominion is one of the most-shorted banks [reported as well on BBG today], in part due to a large position in SCHW. TD was -1.8% yesterday. Wealthion tweeted “US corporate bankruptcies are rising in 2023 with the first two months of the year registering the highest since 2011.”
–New lows in SFRM3/M4 at -158 (-8.5; 9519.0/9677.0) and SFRU3/U4 at -149 (-1.0; 9555.0/9704.0).
Bank strains are unrelated to the inflation fight
April 4, 2023
–FED BULLARD: FED NEEDS RATES ABOVE 5%, HIS FORECAST IS ABOVE MEDIAN;
EXPECT INFLATION TO BE STICKIER, LABOR MARKET STRONG;
STRONG JOB MKT GIVES FED HEADROOM TO FIGHT INFLATION;
MARKETS `SHOULD LISTEN TO ME’ ON RATE OUTLOOK; MARKETS PUTTING TOO MUCH FOCUS ON BANKING STRAINS
–Bullet points from Bullard yesterday are above. One more hike would put funds above 5%, and May Fed Funds settled 9504, now indicating higher than 50/50 odds for a 25 bp hike at the May 3 FOMC (to 5.0-5.25%). Of course, banking and other strains are directly related to the Fed’s hiking campaign, but it’s all about inflation for Bullard. If the hiking in the pipeline should spark a collapse, he can always apologize, like the (former) head of CS or Sam Bankman-Fried. “Sorry. Was that wrong?”
–Of course, the market interprets Bullard this way: the more the Fed tightens now, the more it will have to ease…and soon. SFRM3 and U3 were the only lower contracts on the strip. SFRU3 settled down 1.5 at 9538. while SFRU4 settled UP 15.0 at 9686.0 (U3/U4 spread collapsed to -148). So Bullard says we need rates over 5% and yet the market pencils in rates late next year just above 3%. The Dallas Fed reported yesterday that “demand for bank loans in its districts slumped to the weakest since covid; worst back-to-back readings since the survey began in 2017”.
–A few of the near 3m SOFR calendars also made new recent lows. SFRM3/U3 is -31, U3/Z3 is -36 and Z3/H4 is -44.0. These spreads indicate that easing is expected soon and are a direct repudiation of Bullard.
–In treasuries, the 2yr led yields lower. 2y down 8 bps at 3.982%…(was as high as 5.07% on 3/8). Tens fell 6.4 bps to 3.43%.
–CLK3 settled +4.75 at 80.42 on OPEC production cuts. We can always tap the SPR, right?
–A few large trades, mostly exits:
–SFRM3 9575c cov 9509, 20d at least 50k sold 9.0 (exit)
–SFRM3 9506.25/9537.5 strang bot 24k vs -8k SFRZ3 9562.5^ net 11.5/12.0 (exit)
strangle settled 32.75 * 3 is 98.25 while SFRZ3 9562.5^ settled 109.25; 11.0 in pkg
–SFRJ3 9506.25/9512.5cs cov 08.5, 10d all day 25k sold 2.25
–SFRK3 9606.25/9456.25ps 40k paid 15-16 (this one is new)
3 yrs ago, WTI went negative. Now near 80 bbl on OPEC+ production cuts
April 3, 2023
–CLK3 up 5.2% at 79.62 as of this writing as MBS was apparently displeased that the Biden admin refused to support oil by buying for the SPR with prices in the low 70s. OPEC+ cutting production by 1mbd. It was three years ago in April that front WTI crude went negative during Covid, causing Core PCE to fall below 1%. On Friday, PCE prices were lower than expected at 5.0 with Core 4.6%. Also on Friday Waller cited anchored inflation expectations as an important factor which could support the idea of lower inflation without much in the way of job losses.
–ISM Mfg today expected 47.5.
–Friday featured higher fixed income prices. Ten year yield fell 5 bps to 3.494%.
–Large TY call spread exits Friday. Sale of 40k TYM3 111.5/113.5cs ~1’27, settled 1’40 ref 114-295, and sale of 15k TYM3 113/114cs 1’19 to 1’20. settled 1’24. These were bought right around SVB news, near the lows in TY.
–April FF, which expire at the end of the month, settled 9518.5. One year forward FFJ4 settled 9600.5, or 3.995%. On the treasury curve, only the two year sports a 4% handle (4.06%).
