Chatty Crashy
February 10, 2023
–Front end trading under enormous pressure with new low settles, testing the lowest levels from November. SFRU3 settled -4 at 9490. Red pack led the way, closing down 10.5. SFRM3/Z3 which had been around -50 a couple of weeks ago, settled -35 yesterday, +4.5 on the day (9483.5/9518.5). Near one-year calendars made new highs, with SFRH3/H4 -57, up 8 on the day (9507/9564). The Fed ‘pivot’ is being moved a bit further back on the calendar, and first half hikes are being priced with more certainty.
–2/10 made a new low at -82.5 (low since 1981). Tens rose 5 bps to 3.681%, wi 30 was 3.75% after a sloppy auction. Headlines this morning lead with Russia cutting oil output in response to sanctions; as of this note CLH3 is nearing $80bbl (79.77, +1.71). Tuesday is CPI, which is now the most important data of the month. Today we get U of Mich Sentiment and Inflation expectations. Though still contained, ten year breakeven (Treasury to inflation-indexed yield) is near the upper end of the recent range at 235 bps. Recent midpoint of b/e at 2.25% is just above the Fed’s 2% target.
–Fun tweet circulating yesterday citing DanGPT (ai chat program) as predicting Feb 15 for the start of a market crash.
https://twitter.com/JesseCohenInv/status/1623377252867051520/photo/2
“…While it is impossible to know for sure what will happen, the conditions are in place for a significant market event to occur and investors should be cautious and prepared for the possibility of a market crash caused by a major geopolitical event involving China.”
End of 2022/start of 2023 lows in SPX are around 3800, while October’22 lows were around 3600 (low print 3491). A “crash” would have to take out last year’s low, a move of more than 10% from here. Ironically, Alphabet was down 4.4% yesterday as ChatGPT threatens Google’s dominant search position; reportedly a question asked of Google’s AI chat was answered erroneously, a catalyst for further selling in GOOGL. Wouldn’t it be poetic justice if AI competition sparks the very crash being predicted?
Small financial cracks
February 9, 2023
–Buyer Wednesday of 50k SFRU3 9462.5/9412.5ps for 8.5 covered 9494.5, 18d. Adds to yesterday’s 100k+ buy of the 9450/9400ps for 6.0 cov 9495.5, 14d. Buyer of 20k SFRZ3 9425/9375ps for 3.5, ref 9526. While there’s a lot of option related sell pressure on the front end, and Fed speakers acknowledged more hikes to come, SFRU3 settled +0.5 at 9494.0. It’s somewhat interesting that there’s now 2.9 million SFRU3 put open interest, while futures have just 867k. FFJ3 settled unch’d at 9516 or 4.84%. April is a ‘clean’ month without a Fed meeting. That settle is 26 bps above the current Fed Effective rate of 4.58%, so 25 at the March FOMC is in the bag.
–Stellar 10y auction at 3.613% with great demand metrics. Thirty year today with treasury futures higher across the board this morning. TYH3 settled 113-13, current 113-22+. Jobless Claims this morning expected 190k. Credit Suisse is down 9% this morning with a myriad of news articles outlining continued problems, like this one from the FT: CS slumps to biggest annual loss since financial crisis. There are also fresh articles about vulnerabilities re Softbank, as Masayoshi Son reportedly owes $5b to Softbank. Are these financial fissures contributing to a US treasury bid?
BUY HIGH/SELL LOW
February 8, 2023
–Back in the early 1990’s the FBI infiltrated the currency pits to uncover wrongdoing. No kidding. I think they might have gotten some sort of minor conviction after spending a LOT of money, but the thing I remember is someone saying, “I just don’t understand how this new guy is lasting. He’s a terrible trader. He loses money constantly.” Yes, an FBI agent. They honest-to-God bought memberships and put people into the pits. I’m not really doing the story justice; it deserves much fuller treatment, and I suppose one could draw the conclusion that I am going to use this anecdote to make fun out of some government entity (the Fed perhaps?) that marshals huge resources into schemes that don’t really pay off. I didn’t watch the State of the Union, but I’ll accept Gundlach’s summary, “Let’s spend more money”.
–However, I am not really making fun out of the gov’t (because it’s not a laughing matter). What the FBI guys didn’t really learn is the old adage, ‘buy low, sell high.’ I’m not going to kid you, it’s a tough one. The other gem is, “trade with the trend; the trend is your friend.” So, this year, the trend has been for higher rates. Maybe, just maybe, we’re nearing the end. But we’re seeing roller coaster price action around Fed events, and yesterday that was certainly the case in equities. But in terms of the buy low, sell high thing, let’s rewind back to Fed day: On Feb 1, SFRZ3 9550/9750 c spreads were bought in huge size, 33 to 35 (90k). Settled 40 on that day (43.25/3.25) ref 9568.0. Yesterday that same spread settled 22.75 (24.75/2.0) ref 9524.0. Buy high.
–Uh-oh, someone notices that the trend is for HIGHER rates. And so yesterday, after a 37 bp plunge in SFRU3 since the FOMC, there was a buyer of 110k SFRU3 9450/9400p spreads for 5.75 to 6.0. (Setted 6.0 ref 9493.5, 8.0 and 2.0). Sell low? There could be a lot of good reeasons for this trade: buying protection against higher rates on a much larger portfolio, for example. There are five meetings that will directly impact SFRU3 (if the Sept 20 meeting is included, which occurs just after the IMM date). Current target is 4.5-4.75%. For the put spread to fill in we’d need 6.0 to 6.25%; a hike of 25 at every meeting would be 5.75 to 6.0, and certainty of 25 at the Nov 1 meeting would likely have SFRU3 around the 6% strike. Make sense with Powell saying we’re seeing progress in terms of disinflation occurring?
–Lots of Fed speakers today. Let’s try to stick with the old lessons, ok servers?
Powell today. SFRM4 down 50 in two days!
February 7, 2023
–Red SOFR contracts (H4, M4, U4, Z4, 2nd year forward) were crushed again yesterday on NFP follow-through. Down 24.5 bps on Friday and another 20 yesterday. Post-settle yesterday SFRM4 traded 9619, Thursday’s settle was 9669, for a nice round 1/2% move in two days! Recall there had been a block buy a couple of weeks ago in 0QM3 9550p for 5 (ref 9661.5), that strike was 10.5 bid late. Good jump in vols associated with the move to higher yields. At the Dec FOMC, the year-end 2023 projection for Fed Funds was 5.1%. The market is starting to move toward that level as SFRZ3 settled 9527 or 4.73% and FFF4 settled 9521 or 4.79% (the block seller of 14k at 9559 pre-data Friday took his profit yesterday).
–With weakness concentrated in reds, the near calendar spreads rallied, and spreads from reds back made new recent lows. For example, June’23 to Dec’23 settled -39 (9488/9527) having been around -50 last week. While pricing still reflects Fed easing into year-end, it’s less so. Further back, reds to everything else made new recent lows. For example, red pack was down 20 while greens, (3rd year) were only down 14.375. The spread between the two packs hit -61.625 (9631.375/9693.25), down 10 from Thursday. 2/10 treasury spread ended at -82, also a new recent low. These spreads are indicative of a tight Fed that will clearly be successful in slowing the economy. Of course, the move wouldn’t have been nearly as dramatic if positioning wasn’t offsides. As of yesterday’s settles, NO contract on the SOFR curve is sub-3%. Dec’25 and March’26 are peak contracts, both having settled 9699.5 or 3.005%.
–Powell speaks today, and just about everyone else associated with the Fed will be chirping in tomorrow. Three-yr auction kicks off today, followed by 10s and 30s. Ten year yield ended 3.63%, with w/i a couple bps lower at 3.61. Midcurve Feb SOFR options expire Friday, with atm straddles on March’24 (9576), March’25 (9684.5) and March’26 (9699.5) all 14 to 14.5 bps. An extra four weeks will cost you about 20 bps more, but straddles on more deferred contracts are nominally less expensive because volatility has moved forward and back month yields are lower.
SFRH4 9576.0
0QG3 9575^ 14.5
0QH3 9575^ 35.5 for spread of 21
SFRH5 9684.5
2QG3 9687.5^ 14.0
2QH3 9687.5^ 34.0 for spread of 20
SFRH6 9699.5
3QG3 9700^ 14.0
3QH3 9700^ 31.5 for spread of 17.5
Preparation is key
February 6, 2023
–Huge NFP of 517k saw rate futures fall like an anvil. Red pack in SOFR (H4, M4, U4, Z4) down 24.75, but the average price is still above 9651, or just 3.49% when the Fed just hiked to 4.50-4.75. FFG4 settled -25.5 at 9559.0 or 4.41%. This contract captures the next eight meetings and is just a bit over 8 bps away from the current FFG3 at 9542.75. Of course, there is plenty of fluidity in between, with the lowest FF contract right in the middle, July’23 (FFN3) at 9498 or 5.02%. SFRZ3 atm 9550 straddle settled 69.25.
–The week ahead will likely require geopolitical calculus, as alluded to in the attached picture. Powell speaks tomorrow and there are a bunch of Fed speakers on Wednesday who will be crafting economic roadmaps (figuratively) through treacherous canyons. Preparations are ongoing, using Chatgbp, strike that, I meant THE ACME CENTRAL BANK MANUAL. Markets will respond by warmly embracing the $96 billion in auctions of 3s, 10s and 30s starting Tuesday. The thirty year when-issued yield was 3 5/8% on Friday. If I were Yellen I’d cram as much as possible down the throats of the coyotes to lock that rate.
–Lowest SFR contract is June’23 at 9499 or 5.01%. Highest on the strip is Dec’25 at 9712 or 2.88%, A difference of 213 bps. However, a big chunk of that is captured in the lowest one-year calendar SFRU’3/SFRU’4 at -164.
Jay’s World
February 5, 2023 – Weekly Comment
Let me bring you up to speed. My name is Wayne Campbell. I live in Aurora, Illinois, which is a suburb of Chicago – excellent. I’ve had plenty of jo-jobs; nothing I’d call a career. Let me put it this way: I have an extensive collection of name tags and hairnets.
-Wayne’s World
Leisure and hospitality added 128,000 jobs in January compared with an average of 89,000 jobs per month in 2022. Over the month, food services and drinking places added 99,000 jobs, while employment continued to trend up in accommodation (+15,000). [BLS]
I’m not making fun of these jobs. When I was a kid, I was trying to work up to when I would actually GET a name tag. Department store clerk (Wieboldts), liquor store stockboy (Armanetti’s), painter. I had all those jobs before I became a runner on the CBOT floor. I’ve got a copy of my first Rudolf Wolff paycheck somewhere…those were the days when all the runners knew where good ‘happy hour’ bars were that would have some sort of a free buffet, so they could have dinner for the price of a few beers. The point is, those jobs don’t pay a lot.
How do we get a number of 517k for NFP when (tech) layoff announcements are becoming prevalent? From John Mauldin: “The household data looked huge at 894k jobs added. Except the BLS made a normal ‘adjustment’ to the population control data which actually added 810k of those jobs. That puts the HH survey much more in line with the ADP report of 106k jobs. Seasonal adjustments also had a big effect this time. Jobs growth, while still strong, isn’t as strong as January’s report suggests.”
https://www.bls.gov/news.release/empsit.nr0.htm
[Data above is in a table about ¾ way down]
So what did the markets do? Rate futures erased the rally from Wednesday’s FOMC. On Tuesday TYH3 was 114-165. Thursday’s settle 115-175. Friday 114-135. A bit more aggressive in short rates (same days), SFRM4 9650.5, to 9669.0 to 9643.0. FFG4, a year forward, settled 9559.0 or 441 bps, down 25.5 on Friday. As if the market simply said, ‘let’s remove one of those quarter-point eases we had priced in, because this was a big number.’ As an aside, about 1.25 hours before the release on Friday, someone sold on block, 13996 FFF4 at 9559.0. That contract settled 9538. Probably just a coincidence. At least he had the decency not to cover on Friday afternoon; open interest was +14493.
Also from Mauldin’s weekend piece, quoting Michael Wilson of MS:
As we have noted many times over the past year, the over-earning phenomenon this time was very broad as indicated by the fact that ~80% of S&P industry groups are seeing cost growth in excess of sales growth.
Costs rising faster than sales. Not that great for stocks, one would think. I am way over my head in terms of analyzing quarterly earnings reports. (What I DO remember though, is a new manager at the liquor store having us re-stock the shelves with the best sellers on the easy-to-get-to top shelf, and that we had to tag the prices near the top of the label on the right side, so that the cashiers could always see the price quickly and keep those conveyers moving).
So let’s look at the big retailer: AMZN. Not the report, just the price action.
That’s what we call an island top. All of Thursday’s huge volume, underwater on Friday. Down 8.4%. But I thought I’d look a bit closer at another company, Starbucks*.
From last week’s report, North American revenues (Comp store sales) +10%, of which 1% was change in transactions and 9% was Change in Ticket. So a bit better than inflation. While Operating Income was up 12% to 1212.4 (millions), operating margin compressed over the year from 18.9% to 18.5%. [these results are just N Amer; about 17% of SBUX stores are in China]. Is this what MS’s Wilson is talking about? Anyway, the stock took a profit-taking dive Friday, down 4.4%. Scrolling down in SBUX report, “the company announced the expansion of a partnership with DoorDash…with the goal of full nationwide availability in all 50 states by March 2023.” (isn’t that what nationwide means?). So how’s DoorDash doing? Losses as far as the eye can see. HOW DO WE DO IT? VOLUME. Reported losses proudly exceed estimated losses (and growing) for the past 4 quarters, with the last Sept 2022 qtr at -77 cents per share. Stock closed at 59.02, down 7.48% on Friday, and, like AMZN, completely reversed an upward surge from Thursday.
Starbucks: “Let me get this straight, you’re going to subsidize every delivery made at the expense of your shareholders?” DoorDash “YES WE ARE”. Starbucks, “OK, we’d like to expand our relationship with you!”
As a BBG article headlined: The Fed is all that Matters… “The profit outlook for companies in the S&P 500 Index is rapidly deteriorating – yet analysts can’t raise their stock-price targets fast enough.”
My conclusion is that the market really isn’t fully buying into headline strength of the payroll report. Expectations remain for another 25 bp hike in March. However, a spread like SFRU3/SFRU4 settled -164, up only 2.5 on Friday, just 13 higher than the lowest settle of -177, which is also the most negative of any one-year calendar spread for the cycle. The market is convinced of a slowdown that will necessitate eases beginning some time this year.
Auctions of 3s ($40b), 10s ($35b) and 30s ($21b) start on Tuesday. Only raising $29b new cash.
Powell speaks Tuesday. Williams and Waller and Barr and Bostic and Cook and Kashkari all on Wednesday. If they need to hone the message, the opportunity is this week.
OTHER THOUGHTS /TRADES
Last week I mentioned SFRM3/Z having settled -48, “a rough indication that the market expects 50 bps of ease in 2H.” Well that, of course, was a bit loose in terms of a conclusion, as a friend pointed out. On Friday, SFRM3/Z3 settled -45.5. One might think that a ‘higher for longer’ FF target would be justified given the blockbuster payroll report, and that this spread might have gone much more positive, say to -37ish. Maybe it’s more instructive to look at FF contracts for cleaner estimates of Fed hiking. FFN3 is the lowest contract settle on the FF strip at 9498, and the only one above 5%. There are three meetings in front of this contract: Mar 22, May 3, June 14. There is also a meeting on July 26, which would affect the last 5 days of the contract. Current EFFR (as of Thursday) is 458. FFN3 is 44 bps higher at 502. There is no FOMC meeting in August. That contract (FFQ3) settled 9500, exactly at 5%. According to BBG, the first meeting in January 2024 is the 31st. So the spread from August’23 to Jan’24 is an adequate estimate for tightening in the last half of the year. That spread is -38 (9500/9538).
Huge buyer this week of SFRZ3 9550/9750cs 33 to 35 (90k). Settled Friday at 29.75 ref Z3 9544.5. Somewhat interesting was buying of 94.50 SFRZ3 puts for 4.5 on Friday. Not big size, only 13k traded; settled 5.75. However, it’s a 5.5% strike, an upper estimate for year-end of the more hawkish analysts. Once again, I’ll mention 0QM3 (June 16, 2023 expiration on SFRM4 underlying) 9550p, which settled 5.75 on Friday (up 1.25 on the week) vs SFRM4 9643.0. Open interest in this strike is still the most of any midcurve SOFR put, at 243k.
| 1/27/2023 | 2/3/2023 | chg | ||
| UST 2Y | 420.5 | 429.9 | 9.4 | |
| UST 5Y | 362.1 | 366.2 | 4.1 | |
| UST 10Y | 351.8 | 353.0 | 1.2 | |
| UST 30Y | 363.4 | 362.4 | -1.0 | |
| GERM 2Y | 258.0 | 254.7 | -3.3 | |
| GERM 10Y | 223.9 | 219.2 | -4.7 | |
| JPN 30Y | 157.3 | 151.2 | -6.1 | |
| CHINA 10Y | 292.8 | 289.5 | -3.3 | |
| SOFR H3/H4 | -92.0 | -83.5 | 8.5 | |
| SOFR H4/H5 | -99.0 | -107.0 | -8.0 | |
| SOFR H5/H6 | -7.5 | -8.5 | -1.0 | |
| EUR | 108.69 | 107.99 | -0.70 | |
| CRUDE (CLH3) | 79.68 | 73.39 | -6.29 | |
| SPX | 4070.56 | 4136.48 | 65.92 | 1.6% |
| VIX | 18.51 | 18.33 | -0.18 | |
https://s22.q4cdn.com/869488222/files/doc_financials/2023/q1/1Q23-Earnings-Release-Final-(2.2).pdf
https://www.nasdaq.com/market-activity/stocks/dash/earnings
*I’m short SBUX
Transitioning
February 3, 2023
–Employment data today with NFP expected 190k and Avg Earnings yoy at 4.4% (from 4.6 last). Jobless Claims were again low yesterday at 183k, but Challenger layoffs jumped. I’ve attached a chart and link from Chris Long, “Excluding 2020, we haven’t seen anything like this since Nov 2008 and January 2001.” At the cusp of a hard slowdown in the labor market?
–Post-close earnings reports by AAPL etc, put a lid on frothy price action during the day. A headline on ZH says it was the largest trading day for options of all time. Currently ESH down 34.50 at 4157.
–In the wake of the BOE meeting, Sonia March’23/March’24 spread plunged from -32.5 Wednesday to -61.5 yesterday! In the US Sofr March’23/’24 is -104, down 2 on the day (9518/9622).
–In the US, the ten year yield was little changed at 3.398%, but 2s fell 2 bps. Worth noting, as futures ‘transition’ into SOFR from ED, is that SFRH3/EDH3 spread has collapsed to a new low for the cycle at 13 bps. The transition adjustment is double that. Does that mean that rates on the futures curve are being artificially set 1/8% lower than they ‘should’ be? Probably not, but the compression in the only libor-based futures spreads that actually trade with a spread, March at 13 and June at 16.5, sort of enhance the ‘risk-on’ cocktail.
–SOFR straddles also continue to compress. Not that there’s much trade in the long greens, but those straddles were marked down by 3.5 to 5 bps. What DID trade was SFRZ3 9568.75^, which was sold (new) 25k, settling 66.75 ref 9570. Dec atm straddles have been sold heavily since December. There is a LOT of open interest in both calls and puts in SFRZ3, more than 2.5 million in both.
Powell greenlights risk
February 2, 2023
–A friend deemed yesterday as a “tactical error” by Powell, which would create a rally in risk and housing, thereby encouraging the same conditions that helped spark inflationary impulses in the first place. The gold market likes it, with GCJ at new recent highs of 1971, up $28/oz. Powell sees disinflation in goods…making clear progress. Stocks surged. On Tuesday, Timiraos noted that Fed staff had elevated concerns regarding the persistence of inflation; yesterday Powell seemed to ignore that message. If you wanted to tempt the fate of backsliding, you accomplished it.
–Five yr yield plunged 14.7 bps to 3.493%, tens down 13.6 to 3.393%. On the SOFR curve, reds (2nd yr forward) were up 15.625 to an avg price 9673.375, and greens up 15.625 to 9728.375. April FF only up 0.5 to 9521.5, indicating expectations of another 25 bp hike in March (Current EFFR is 458, another 25 would be 483 or 9517). SPX up over 1%, Nasdaq Comp +2.0%, new low in the dollar index.
–Massive buying of SFRZ3 call spreads contrubuted to an increase in open interest of that contract of 43k. Settled 9568, +9.5.
Buyer (pre-meeting) of 90k SFRZ3 9550/9750cs 33 to 35. Settled 40 (43.25/3.25) with net 52 delta vs 9568. OI in the strikes +71k and +61k. The 9575/9775cs also bought 25 to 25.5, settled 29.25 (31.5/2.25) net 43 delta. OI +22.5k and +26k.
–ECB and BOE today. US employment report Friday has likely become less significant.
On Tuesday I marked the Wednesday expiration atm straddles: TY 114.5^ was 36 and US 130^ was 62. The market blew through upper breakevens of 115-02 (115-15+s) and 130-31 (131-21s).
Late markets for Friday’s expiry:
TYH2 115-13
Friday 115.5^ 0’48/0’50
USH3 131-14
Friday 131.5^ 1’23/1’26
FOMC day
Feb 1, 2023
–What happened Tuesday? Monday was reversed, that’s all. FVH3 settle Friday 109-10, yesterday 109-0775. TYH3 Friday 114-195, yesterday 114-165, USH 130-05, yest 129-28. SFRM4 9652.5 to 50.5. ESH3 4084.25 to 4090.0 CLH3 79.68 to 78.87. FOMC today. Powell pushback against pivot. June’23/Dec’23 SOFR calendar settled -48 (9510.5/9558.5). If Powell is successful, then this spread should move more positive…maybe to -42?
–What’s the terminal rate? Every SOFR contract for two years, from March’25 to March’27 is between 9706.0 and 9716.0. So 2.75-3.0%.
–FFG3 settled 9542.0. FFJ3 9521.0. Ten year 3.53%
–I marked this week’s atm straddles late yesterday (for today and Friday expiration) given all the interest in 0-1 dte.
TY Wed 114.5^ 35/36
b/e 113-305/115-015
TY Fri 114.5^ 60/61
b/e 113-180/115-140
US Wed 130^ 61/63
b/e 129-01/130-31
US Fri 130^ 143/145
b/e 128-10/131-22
–ADP expected 180k, ISM Mfg 48 from 48.4, and JOLTs 10300k
Fed staff supports Powell
January 31, 2023
–A tweet from WSJ’s Timiraos yesterday: “Last month, the Fed’s staff revised its economic outlook in ways that imply inflation will be more persistent. ‘It was a significant move,’ said Riccardo Trezzi, a former Fed economist. ‘The staff is telling the committee, You cannot give up now.'”
–In a way, that clip captures market sentiment yesterday: the curve flattened with 2yr up 5.2 bps to 4.257% and 10yr up just 3.2 to 3.55%. On the SOFR curve, reds led the way, closing down 9.5, with greens -7.75 and blues down 6.0. Near one-year calendars rallied on the higher-for-longer bias, with SFRU3/SFRU4 up 6 bps to -149.5 (9522.5/9672.0; still the most inverted 1yr on the curve). SFRZ3/Z4 settled -135 (9553.5/9688.5), a nice bounce from last week’s block buy of 49k at -146.0.
–When reading the FOMC minutes, staff description of the economy and financial conditions can occasionally strike a much different tone from comments by participants of the committee. Recently I had read that Powell was upset staff hadn’t initially warned of the danger that inflation would be more persistent rather than transitory. Last month’s tweak could be a response to that. In any case, the market is locked onto an increase of 25 bps tomorrow.
–The IMF raised its global growth forecast, yet CLH3 is down over $1/bbl this morning at 76.76. Stocks also starting lower, but there are a lot of earnings reports (CAT MCD SNAP XOM to cite a few)
–News today includes Emp Cost Index for Q4, expected +1.1%, Chgo PMI expected 45.1 vs 44.9 last, Consumer Confidence 109.
