Funding
January 29, 2023 – Weekly Comment
The above is a chart of various rates. White is Fed Funds midpoint, blue is the 2y treasury, purple the 10y, green the bankrate avg 30y mortgage, and red is yoy CPI.
Next week the Fed is going to raise the FF range to 4.5-4.75% with a midpoint of 4.625% and EFFR of 458 bps. It’s already the case that FFs are above everything on the treasury curve, and that negative carry is going to get a bit more extreme with the increase in overnight funding. Regarding CPI and the 30y mortgage, there has been a small crossover there as well. This probably is NOT the appropriate way to think about it, but I sort of imagine CPI as being a rough proxy for housing. If the 30y mortgage rate exceeds the appreciation rate of housing, it likely works to stifle prices.
Powell is going to emphasize at the press conference that easing is NOT likely to occur this year. To me, it doesn’t much matter whether he says it aggressively or gently, the fact is, high funding costs are restrictive. Core PCE prices (yoy 4.4%) are already below the new FF target of 4.625%. As macro guru Ted Nugent might say, “Got you in a stranglehold baby.” Powell has already alluded to the idea that it’s not the exact level of terminal rates the Fed needs to achieve, it’s the duration. All he has to do is convince the market of the Fed’s resolve and let it happen.
Below are some excerpts of Market Huddle’s (Kevin Muir) interview of Nomura’s Charlie McElligott. Quotes are lightly edited for brevity.
McElligott refers to “…immaculate disinflation” and asks “…what does that mean? It means relative to where we were on terminal rates a few months ago, that the faster than expected disinflation that we’re seeing means past peak inflation, past peak Fed, means a lower terminal rate, and that is a defacto rate cut. So you’re seeing a big resumption in vol selling strategies again…and that feeds into the behavior of meme stocks, behavior of high yield etc.”
Below I have inserted a chart of the MOVE/treasury vol index, which is nearing the lows of last year. VIX is also at the low end of last year’s range.
While the clip above identifies what is currently happening, in the excerpt below McElligott notes that the rapid shift in financial conditions supporting better growth may elicit a more hawkish tone from Powell:
“.. nobody had anticipated… this growth stabilization globally and how quickly it happened and how all three forces aligned at the same time, and when you’re talking about, in the span of a couple of weeks as I said, you’re seeing 200 bps tighter in hi-yield spreads, you’re talking 90 bps lower in 30yr jumbo mortgage, seeing re-acceleration in housing data, and durable goods and jobless claims still beating and nominal GDP is at 7 or 8%! If housing re-stabilizes and that kicks off animal spirits and a wealth effect back into the market, all of the good work that you’ve done with regard to trying to lean into demand-side inflation is very much at risk and then that whole ghost of Arthur Burns situation starts coming up again…it is the velocity of this FCI easing into the recent data beats has changed the calculus on Powell next week.”
He also noted that 0 to 1 DTE (days to expiration) options in SPY are around 68% of total volume. If short on time, listen from about 1:20 forward.
https://twitter.com/TheMarketHuddle/status/1619164583486279681
With respect to real estate and animal spirits, it’s worth noting a twitter thread on Wednesday by Redfin CEO Glenn Kelman saying that housing is recovering, better than expected. He concludes, “The market could still easily falter. But housing in January has been stronger than anyone could’ve hoped.” Redfin (RDFN) stock was up 19.7% on Friday. High since Sept.
Big week for news, with FOMC result Wednesday, ADP, ISM Mfg and JOLTs also on Wednesday. Employment Report on Friday, with rate expected 3.6% and NFP 190k.
OTHER THOUGHTS /TRADES
FFG3 settled 9542.5; the market is locked on a hike of 25 which should make FFG3 final settle 9542.9. The next FOMC is March 22. April is a ‘clean’ month; FFJ3 settled 9521 or 479 bps. Another 25 bp hike in March would make EFFR 483 (9517 for FFJ3).
SFRM3/Z3 settled -48 (9511, 9559, +6.5 on the week), a rough indication that the market expects 50 bps of ease in 2H.
SFRZ3/M4 settled -93.5 (9559, 9652.5, +10 on the week). Still inverted by nearly 1%, though going into FOMC the market is gingerly paring back easing expectations.
0QM3 (June 16, 2023 expiration on SFRM4 underlying) 9550p settled 4.5 vs 9652.5. These puts have the highest open interest of any midcurve at 213k, up nearly 16k on Friday. An original 40k block was bought paying 5 ref 9661, so vol has obviously declined. Low print last week was 3.5 ref 9664. SFRZ3 is 9559, so if the Fed renews its assault on growth and inflation, a roll-down in SFRM4 could approach strike. Delta is -0.11.
Feb SOFR midcurves expire one week from Friday on Feb 10. SFRH4 settled 9608. I wouldn’t be surprised to see demand for 0QG3 9587.5p going into the Fed, settled 3.5. 9575p settled 1.5.
On January 6, SFRZ3 settled 9559.5 and the 9562.5^ settled 86.5. Three weeks later, on Friday, SFRZ3 settled 9559.0 and the 9562.5^ at 69.5, a 20% decline.
Just a couple of commodity notes: At the beginning of September the front NatGas contract was $9. Now it’s just over $3. In March, Lumber was over 1400, now it’s just under 500. In June, BCOM (bbg commodity index) was over 135, now 111. In June WTI was over 120, now 80. Perhaps these moves spur a disinflationary mindset, but Powell still might feel the need to press against strength in the labor market and housing. Again, from Nugent’s stranglehold, “And if a house gets in my way baby/You know I’ll burn it down.”
| 1/20/2023 | 1/27/2023 | chg | ||
| UST 2Y | 412.0 | 420.5 | 8.5 | |
| UST 5Y | 354.2 | 362.1 | 7.9 | |
| UST 10Y | 348.2 | 351.8 | 3.6 | |
| UST 30Y | 365.3 | 363.4 | -1.9 | |
| GERM 2Y | 257.7 | 258.0 | 0.3 | |
| GERM 10Y | 217.7 | 223.9 | 6.2 | |
| JPN 30Y | 152.3 | 157.3 | 5.0 | |
| CHINA 10Y | 292.8 | 292.8 | 0.0 | |
| SOFR H3/H4 | -104.0 | -92.0 | 12.0 | |
| SOFR H4/H5 | -100.0 | -99.0 | 1.0 | |
| SOFR H5/H6 | -3.5 | -7.5 | -4.0 | |
| EUR | 108.57 | 108.69 | 0.12 | |
| CRUDE (CLH3) | 81.64 | 79.68 | -1.96 | |
| SPX | 3972.61 | 4070.56 | 97.95 | 2.5% |
| VIX | 19.85 | 18.51 | -1.34 | |
PCE prices today to set tone for FOMC next week
January 27, 2023
–Today’s news includes the Fed’s preferred measure of inflation, PCE prices. M/M expected 0.0 with Core +0.3%. YOY expected 5.0% from 5.5% with Core 4.4% from 4.7%. FOMC is Wednesday.
–Yesterday’s economic data generally good, with Jobless Claims surprisingly low at 186k. Advance Q4 GDP 2.9%. The last Atlanta Fed Q4 GDP estimate was 3.5%, so the official reading will likely be revised slightly higher over time. Another solid auction cycle wrapped up with the 7y. The ten year yield rose 3.5 bps to 3.489%.
–Large buy SFRJ 9525/9537.5cs for 2…. 45k. Settled 2 ref SFRM3 9511.5, open interest in the two strikes changed +22k and +10k. 0QM3 9550p more bought…4 paid 20k on block ref SFRM4 9658.5, which is right where it settled. Earlier in the week, 5 was paid ref 9660.5, so vol has declined significantly. OI in the strike is now 197k (+26.7k), the most of any midcurve put in SOFR. Curve suggests a tailwind due to roll-down, with SFRH4 futures at 9612.5 and SFRZ3 9562.0. 0QH3 9550p (short March midcurve on SFRH4) settled 2.0, so roll isn’t quite offsetting the passage of time. There is a lot of ease priced into the curve; SFRM3/M4 is -147 (9511.5/9658.5). How forceful will Powell be next week in terms of hammering home the NO EASE message? As financial conditions ease, Powell could use this opportunity to reinforce the succinct theme from Jackson Hole: the Fed will stay tight until the job is done.
–Nasdaq 100 closed just above the 200 DMA while Nasdaq Comp closed right at that level. Somewhat interesting as all the big stocks, AAPL, GOOGL, AMZN, MSFT, META TSLA, are well below 200 DMAs. CLH3 currently 82.01, up an even dollar; this has been a pivotal level since last September, and a close above 82 would suggest follow-through strength.
–Japan Core CPI 4.3% with 10y JGB nearing the 50 bp cap again. There’s a lot of press about Adani Group companies in India getting crushed due to a report from Hindenburg alleging fraud. Not sure of a spillover effect, but it comes right after reports of India’s population overtaking China’s.
The Vengeance
January 26, 2023
–Large trade yesterday was a block of 49k buys SFRZ3/Z4 for -146. Said to be an exit; open interest rose 880 in Z3 and fell 44294 in Z3. The most inverted one-yr calendar remains SFRU3/U4 at -162.5 (9531.5/9694.0) up 5.5 on the day, having posted an all-time low of -177 last week. The low in Z3/Z4 last week was -152.5, yesterday’s settle was -143.5 (9565.5/9709). When all was said and done, SOFR futures volume was just over 2.277 million and open interest net change was down 81 contracts.
–Also on SFRZ3 a new buyer of 60k 9700/9750/9800c fly for 1.5. Need cuts of a couple of hundred bps on that one by year end.
–Yields fell slightly in treasuries with tens -1.2 bps to 3.454%. Stellar five-year auction with 7s today. Is there a safe harbor aspect to the treasury bid? …given tank deliveries to Ukraine and German Foreign Minister Annalena Baerbock saying yesterday the EU is at war with Russia. I personally am not sure whether to buy treasuries, gold, or one of these things:
| Pepper spray for the school run? The weaponised SUV set to terrify America’s streets | Design | The GuardianStyled like an Elon Musk fever dream, its great bulk sculpted with clunking facets, the Vengeance is the latest heady concoction to emerge from Irvine, California-based Rezvani Motors.www.theguardian.com |
–Bank of Canada raised by 25 and may be done. Could soft PCE prices spark the same sentiment in US? Core PCE price mom expected 0.3 with yoy 4.4%. Today brings Jobless Claims expected 205k, and Q4 Advance GDP expected 2.6% with Price Index 3.3%.
The world goes on
January 25, 2023
–Yields fell yesterday with tens down 5.5 to 3.466%. Five yr auction today, with wi 3.565%.
–“Glitch” on NYSE caused havoc at open, with some trades canceled. This follows the “glitch” related to air traffic control a couple of weeks ago that grounded all flights.
–Vol easing with VIX at 20, but even MSFT’s after-hours range following earnings is over 6%, from 253 in the afternoon to 237 this morning.
–A couple of tweets from yesterday: The doomsday clock was moved to 90 seconds. Juxtaposed with that is the oldest olive tree, in Crete, over 3000 years old. A survivor of all the world’s hazards, misfortunes, and victories.
| USA TODAY Graphics on Twitter: “The Doomsday Clock was moved to 90 seconds to midnight today, Jan. 24, the closest it’s ever been. The Doomsday Clock is a decades-long project of the Bulletin of the Atomic Scientists featuring a clock face where midnight represents Armageddon. https://t.co/uG9vmchRXK https://t.co/IFM1gmIjjT” / TwitterThe Doomsday Clock was moved to 90 seconds to midnight today, Jan. 24, the closest it’s ever been. The Doomsday Clock is a decades-long project of the Bulletin of the Atomic Scientists featuring a clock face where midnight represents Armageddon.twitter.com |
| Fascinating on Twitter: “The world’s oldest olive tree is over 3,000 years old, dating back to Minoan times between 1350 – 1100 BC. You can find it in Kavousi, Crete, Greece. Read more: https://t.co/XLYiF1TB5i https://t.co/QApYRZAM6X” / TwitterThis yew tree in Totteridge is about 2,000 years old & is thought to be the oldest living thing in London Trees have different lifespans For example, the blueprint for the lifespan of an oak tree is about 1,000 years The blueprint for the ‘eternal yew’ is to grow forever.twitter.com |
A look at SFRM4 (just as boring as it sounds)
January 24, 2023
–PCE prices on Friday (Fed’s preferred measure of inflation). Two year auction today, followed by 5’s and 7’s Wednesday and Thursday.
–Last week, many trades focused on front March, June and Sept, in terms of pegging a terminal rate. Yesterday, the focus shifted to reds. For example, there was a buyer of 20k 0QM3 9600/9550/9500p 1x3x2 for 2.25 to 2.5. Settle prices were 14.0/5.0/1.75 so 2.5 ref 9559.5 in SFRM4. (0QM are midcurves on June’24, expiring 6/16/23). There was also a late block buyer of 72k 0QM3 9550p for 5.0. Open interest changes in the three strikes, according to prelim: +33k, +20k, -76k on volumes 37k, 160k, 76k. In any case, just to put the price of June’24 in context, SFRM3/SFRM4 spread settled -151.5 (9508/9659.5). SFRZ3/M4, six-month calendar, is inverted by over 100 (9558/9659.5). So there’s a LOT of easing priced in. Could the contract ever get to 9550? That would take a large shift in expectations, however, in November the range was 9553.5 to 9650, a huge 96.5 bps!. The range in December was 9616 to 9668 (52 bps). This month so far 9613 to 9690 (77 bps). The 9662.5^ settled 72.0. Clearly, if the market is wrong about easing prospects, as Waller suggested at the end of last week, then some sort of short in reds makes sense. However, the spreads have been inverted for a long time.
–MSFT earnings post-close.
Can inflation miraculously melt?
January 22, 2023 – Weekly comment
Just a few thoughts here that don’t necessarily lead to any strong conclusions.
Liz Ann Sonders tweeted this on Friday: Used Car Value index from Manheim…”has been less bad MTD…but -13.7% yoy drop is still one of the worst readings on record.
Fed’s Waller on Friday: “The market has a very optimistic view that inflation is just going to melt away. We have a different view, that inflation is not going to just miraculously melt away. It’s going to be a slower, harder slog to get inflation down, and therefore we have to keep rates higher for longer and not start cutting rates by the end of the year.”
It’s obvious from the Manheim chart that car prices were a huge contributor to inflation. I’m not saying that Waller is wrong about the decline of inflation being slower, but the drop in used car prices does appear to be a miraculous meltdown. Could the Fed be just as wrong about the speed of inflation’s decline as they were about ‘transitory’?
Of course, used car price data naturally leads to questions about rising delinquencies. A quick search found that Auto Loans delinquent by 90+ days for Q3 2022 is 3.89% and rising. While I was on this rabbit-hole search I saw a BBG note from November that the delinquency rate for subprime auto loan bonds was 5.13% as of October, based on borrowers late 61 days or more, as compared with 3.76% from the previous year. I also found this delinquency rate on credit card loans from smaller banks (and note that smaller banks are the ones increasingly tapping the Discount Window, according to the NY Fed [link at bottom]).
At 6.88% for Q3 2022, it’s the highest delinquency since 1991, outside of the covid spike in Q1 2020. It way exceeds the GFC. When loans go bad, the price of collateral falls. We’ve seen that recently with crypto. What’s the collateral on credit card loans? Certainly not all the consumer crap that was purchased; it’s credit scores and borrower income. The fraying starts at the edges. Of course, we know all that. We know that calls for recession have been non-stop ever since the definition had to change after the two consecutive quarters of GDP contraction in the first half of last year. The only question is, of course, how fast and how deep?
One other quick haphazard research item: I had seen a note that the decline in the TGA (Treasury Gen’l Acct) at the Fed was partially offsetting QT. In May 2022 TGA was $945B and last week was $339B. It’s not a linear decline, call it $80b per month. That dynamic doesn’t seem likely to continue, and will probably hasten the end of QT. But here’s another random data point: US currency in circulation was $1.799T in December 2019. As of the end of last year it’s $2.297T. An increase of nearly $500 billion in three years. Where’s the demand for that? (Besides suitcases for Hunter). I never see anyone paying in cash besides me. Is it for those sad ubiquitous tip jars that usually have 1 or 2 crumpled singles and a pile of nickels and pennies? Or is the demand for $100 bills related to a store of value in Russia and elsewhere; a unit of anonymous transaction for those that don’t wish to be tracked? I’d bet, well, I’d bet $100 that there are a LOT of $100 bills circulating around in Davos. The treasury wants to track transactions of $600 in banking accounts. Just seems odd that US ccy in circulation has increased by 27% in three years. By the way, that three year increase of $500 billion is more than the market cap of bitcoin ($440b). Another fun coincidence, the dollar price of gold is up a similar 32% since the end of 2019.
There are many technical aspects of monetary policy affecting markets which are way beyond my grasp. For example, the circus related to the debt ceiling. Here’s what I DO know. The current limit of $31.38 trillion is gargantuan. According to the Fed’s Z.1 report, Fedl debt outstanding at the end of 2019 was $19.04T. In the GFC, private debts were shifted to the government. By comparison the latest shift was much larger. How does the market accept a 3.5% yield for US ten-year treasuries?
WHAT ACTUAL TRADES ARE REFLECTING ABOUT THE PATH OF POLICY
As I mentioned last week, a sale of FFG3 is an easy hedge for those concerned about the possibility of a 50 bp hike on Feb 1. Fed Effective (EFFR) has been 433 since the last hike. Feb has 28 days. One day at 433 and twenty-seven at 458 would lead to a settlement price of 457.1 or 9542.9. FFG3 settled 9542 on Friday.
So the market is expecting 25 in Feb. The next meeting is March 22; there is no meeting in April. FFJ3 settled 9522 or 4.78%, or 20 bps higher than what will likely be the new EFFR of 458. So we’re looking at high odds of 25 at the March meeting.
SOFR Rate is around 3 bps lower than EFFR. FF futures settle to the daily average of the EFFR while SOFR futures settle to the daily compounded rate of SOFR, so after compounding, the rates are currently very close.
This past week there was huge buying of call condors and butterflies that are a play for one or two more 25 bp hikes and then a slight bias toward ease. These plays have been well covered on twitter and elsewhere so I will just note strikes and settlements from Friday.
SFRH3 9512.5/9518.75/9525/9537.5 broken call condor settled 2.75 ref 9516; max value 6.25 between 9518.75 and 9525.
SFRM3 9500/9512.5/9525/9537.5 c condor settled 3.75 ref 9511; max value of 12.5 between 9512.5 and 9525.
SFRU3 9500/9550/9600 c fly settled 14.25 ref 9528.5; max value of 50 is if SFRU3 expires exactly at 9550.
SFRU3/SFRU4 is the most inverted one-year calendar on the strip. It settled -169.5 but traded as low as -181 on Thursday. Over this period, the market is forcefully expressing the need for easing.
| 1/13/2023 | 1/20/2023 | chg | ||
| UST 2Y | 423.4 | 418.0 | -5.4 | wi 412.0 |
| UST 5Y | 361.1 | 356.5 | -4.6 | wi 354.2 |
| UST 10Y | 350.9 | 348.2 | -2.7 | |
| UST 30Y | 361.9 | 365.3 | 3.4 | |
| GERM 2Y | 259.2 | 257.7 | -1.5 | |
| GERM 10Y | 216.8 | 217.7 | 0.9 | |
| JPN 30Y | 161.0 | 152.3 | -8.7 | |
| CHINA 10Y | 289.8 | 292.8 | 3.0 | |
| SOFR H3/H4 | -97.5 | -104.0 | -6.5 | |
| SOFR H4/H5 | -101.5 | -100.0 | 1.5 | |
| SOFR H5/H6 | -8.5 | -3.5 | 5.0 | |
| EUR | 108.33 | 108.57 | 0.24 | |
| CRUDE (CLH3) | 80.11 | 81.64 | 1.53 | |
| SPX | 3999.09 | 3972.61 | -26.48 | -0.7% |
| VIX | 18.35 | 19.85 | 1.50 | |
Teach Your Children Well (Crosby Stills Nash & Young)
January 20, 2023
–Interesting comments from Brainard yesterday; here are a couple of snippets:
Core PCE inflation is running at a 3.1 percent annualized pace on a 3-month basis—below its 3.8 percent reading on a 6-month basis and 4.5 percent on a 12-month basis.
…housing services inflation remains stubbornly high at 8.8 percent on a 3-month basis—compared with 7.7 percent on a 12-month basis. Housing services are making an annualized contribution to core PCE that is more than double their contribution before the pandemic. That said, the housing sector is highly interest sensitive, and the most recent reading of one national indicator pointed to house prices having declined 2.5 percent over the five months ending in November.
Overall, the labor share of income has declined over the past two years and appears to be at or below pre-pandemic levels, while corporate profits as a share of GDP remain near postwar highs.
–If Core PCE is 3.1% and housing is making an outsized contribution, then the recent declines in housing prices should bring Core down even more rapidly. On the labor side she pointed out that “employment at temp-help services firms – a good leading indicator – peaked in July ’22 and have been declining since then, ending the yr only slightly above its Dec 2019 level.”
–On that score, note that Google is cutting 12k jobs, immediately after MSFT announced a cut of 10k. Do I hear 14?
–The market has accepted 25 bps as the probable outcome of the Feb 1 FOMC, with FFG3 settling 9541.5 or 4.585%. Current EFFR is 433. The subsequent meeting is March 22, a week and a half after SFRH3 options expire. April FF, a ‘clean’ month with no FOMC, settled 9522 or 4.78%, indicating high odds of another 25 in March.
–Huge trades went through SOFR options yesterday to peg these outcomes: +80k SFRH3 9512.5/9518.75/9525/9537.5c condor for 1.5 to 1.75 (settled 1.5 vs 9516.5). Max profit of 6.25 less premium paid occurs between middle strikes, that is, two more 25 bp hikes. In June SOFR it was the 9500/9512.5/9525/9537.5 c condor, bought for 3.5 to 3.75 in size >40k. Settled 3.75 vs 9513. Same idea.
–Ten yr yield rose 2.4 yesterday to 3.397%. One-yr SOFR calendars remain anchored at new lows, though SFRZ23/Z24 squeaked out a new low at -152.5.
–Lacy Hunt’s Hoisington missive. It’s all about velocity…
https://hoisington.com/pdf/HIM2022Q4NP.pdf
Pivot accentuated
January 19, 2023
–Data released Wednesday was uniformly weak. Retail Sales were -1.1% (expected -0.8). PPI, expected -0.1 was -0.5, with yoy 6.2 vs expected 6.8 and Core 5.5. Industrial Production was -0.7. Negative job announcements continue, with MSFT cutting 10k, BofA freezing hiring. Against this backdrop Bullard once again said the Fed needs to get funds above 5% as fast as possible. Perhaps unsurprisingly, the near 1-yr SOFR calendars made new lows. The most inverted, U3/U4 settled -177 (9536/9713) down 11.5 on the day. New historic low for the cycle. H3/H4, the first slot, settled -115.5 (9518/9633.5). Longer yields plunged, with uncharacteristically strong demand for yesterday’s 20y auction. 5’s fell 17.4 bps to 3.433%, 10’s down 15.8 to 3.373% and 30’s down 10.2 to 3.542%. Market perceptions of a forward ease helped 5/30 spread pop to a new recent high of 10.9, testing the high from Nov.
–Closer in on the SOFR curve, SFRM3/U3 (June/Sept 3m spd) settled-19.5. Previously I had highlighted this spread as there had been a huge buyer of approx 50k at -19 on Dec 23. By Jan 5 it rallied to -12.5 in a sign that Fed officials might actually be able to hold rates at the ‘terminal rate’ through year-end. The rhetoric from the Fed hasn’t really changed much, but the curve (thru inverted sprds) is saying loud and clear that eases are coming, and they are coming this year. And, in a side note, while treasury vol was lower, SFRZ3 moved to a higher strike of 9575 (9575.5s) but the straddle settled 74.5 vs 70 for the 9562.5^ Tuesday.
–So…..good for stocks right? Bad news is good news because of looser monetary policy in the future? Um, not this time. SPX -1.56% and Nasdaq Comp -1.24%. I own a couple of what I consider defensive stocks, Kraft (KHC) smoked by 6.3% and Altria (MO) -2.55%. Not quite sure how to interpret those moves (other than, ‘they’re out to get me’) but could it all be a sign of a consumer that is running on fumes? I am starting to feel like it’s the end of 2018, when Powell said ‘we’re a long way from neutral’ with respect to future hiking plans, but stocks tanked and the Fed was forced into a pivot in 2019.
–News today includes Housing Starts 1.358m, Philly Fed, -11 vs -13.8 last, and Jobless Claims expected 214k.
E – M – P – I -R – E
January 18, 2023
–BOJ held to ultra easy policy and the 50bp cap on 10y JGBs, causing long yields to ease and $/yen to rebound to 131.50 (now just over 129). Yesterday US tens were up 2.2 bps in yield to 3.53% but now 3.476%.
–Many years ago in the euro$ option pit when it was packed with traders at the 30 S Wacker floor, a newer filling broker got a huge buy order right near the close. Something like 10k contracts. The broker started buying, but in those days when the 2:00 pm bell rang, trading was over. The broker, in his panic to fill the order before the bell, significantly over bought, by several thousand contracts if I remember correctly, and it wasn’t a low delta trade. He realizes his error after the close, and frantically is trying to find all the locals that sold to him to beg them to shave back their totals so that he’s not stuck on the extra buys. As many people that would cram into the pit during the day, it emptied immediately after the bell, so by 2:05 maybe a tenth of the pit would still be standing around. The broker, still in what is called ‘a personal fast market’ is trying to find someone who had already left and breathlessly asks URP, a large market maker, if he has this other guy’s phone number. URP says yeah, probably, and studiously looks at his phone and says, “Oh yeah, here it is: 312 588 2300”. The broker immediately jumps on a phone and calls.
Anybody who grew up in Chicago knows “five eight eight, two three hundred” is the Empire Carpets advertising jingle, because those ads ran day and night. Of course, Steve, in his panic, didn’t recognize it, and got the Empire Carpets switchboard. Now that’s funny. And all I heard in my head when I saw the abysmal Empire State manufacturing number at -32.9 was the jingle: 5 8 8 2 3 hundred, EMP – IRE! Anyway, that’s a long detour just to note that Empire was the worst it’s been since the GFC, outside of the brief covid spike down.
–Today we have Retail Sales expected -0.9, PPI -0.1 with yoy 6.8% and Core 5.6%. IP and Beige Book as well. 20 year auction.
–SFRZ3 9562.5 settled 70 ref 9566. Some buying at 71 occurred, but recall this straddle was sold heavily just a couple of weeks ago at 84 to 80.
–Somewhat interesting note from the NY Fed yesterday noting the increase in discount window borrowings. In the old days, borrowing from the discount window meant trouble, a stigmatizing last resort. Takeaways from the paper: In March 2020 during Covid, the Fed made two changes: it eliminated the punative spread to FF and tenor was increased to 90 days. Stigma has faded and now smaller banks are tapping the DW as the rate is lower than borrowing from FHLBs. Just another case of a small shift in market risk to the government from the private sector.
BOJ turmoil
January 17, 2023
–Friday featured pressure on red pack and 2y note, with reds -11.25 and 2y up 9.6 bps to 4.234%. Curve was flatter with 2/10 down 4 to -72.5 as 10y yield ended 3.51%. New low in Z3/Z4 SOFR one-yr calendar at -144.5, with U3/U4 still the low at -165.
–BOJ meeting tomorrow with 10y JGB pegged to 50 bps and the market continuing to test higher yields. Monday morning the yield nearly hit 55 bps. Uncertainty about the BOJ appears to have spilled over to the US. On Friday USH settled 130-00, yesterday it was around 129-16 and this Tuesday morning as of writing it’s 129-05. News today includes Empire State expected -8.7 from last at -11.2. NY Fed’s Williams speaks later in the day. Retail Sales, PPI and 20y auction all tomorrow.
–Decent buyer of SFRU3 9500/9525/9550 call fly 13.5 to 14.5 in 15k Friday. SFRU3 settled middle strike 9524, and that’s where the buyer would like to see it freeze.
–Bitcoin took a jaunt over the weekend up to 21k and has maintained that level into this morning. When administrators seize the collateral from Ponzis they blow it out (to 16-17k). Then, there’s no one left to sell. Let’s all channel our inner Caroline Ellison and just buy… and yes, I am holding a long position in some otm BITO calls, and am shamelessly hoping BTC rallies further. $/yen currently 128.82, stabilizing in front of BOJ after last week’s drubbing.
