Complications
January 15, 2023
Ironically, last week’s lower CPI data, (-0.1 m/m, 6.5% yoy) and decline in UofM’s 1-yr inflation expectation to 4.0% complicates the Fed’s job going forward. That’s because a general ‘risk-on’ sentiment seems to be taking hold, bolstered in part by the weakening dollar. Below is a chart of DXY, which on Friday printed exactly at the 50% retracement level from the 2020 low of 89.21 to last September’s high of 114.78. That level is 102. The weakening dollar is a large factor with respect to easing financial conditions.
Though there have been a lot of lay-off announcements, the last unemployment rate was still at the historically low level of 3.5%. The problem for the Fed is that solid employment and levitating markets could give rise to a new bout of inflationary impulses. This week SPX gained 2.7% and closed above the 200 DMA. CLH3 (March WTI Crude) was up 8% to 80.11. Copper closed at the highest level since last June. The 10y note yield ended 3.51% Friday, about 75 bps below the high of 4.24 made in October. Short term rate futures have consistently telegraphed easing later this year into 2024, and that pricing was accentuated last week. For example, the most inverted 1-yr SOFR calendar is Sept’23/Sept’24 and it settled as low as -168.5 (-165 settle on Friday, -7.5 on the week), lower than any 1-yr spread going back to 1990. At the end of October SFRU3/U4 was -79. Bitcoin traded above $21k on Saturday!!! (vs $17k one week ago).
The market has now placed near certainty on odds of a 25 bp hike at the Feb 1 FOMC (more on that below). Powell needs to be more emphatic than ever about the need to maintain restrictive rates in order to stifle speculative excess.
Last week my BBG feed had this headline: ‘KB Home sends warning for Builders’ stocks with miss on orders.’ From the article:
KB Home sank by as much as 6.7%, the most intraday in about four months, after reporting less than 700 new orders in the quarter. That marks an 80% drop from the year before, falling far below consensus analyst expectations for about 2,000 orders…
That’s bad news. 700 orders vs 2000 expected! Yet, look at the stock chart. At 35.10 it’s above the 200 DMA. The stock is 37% above the late September low of 25.51. P/E is 3.7.
I don’t know that one would call the bounce in this specific stock a red flag for general speculative excess, but longer dated treasuries have rallied in the past three months to relatively low yields, and that likely makes the Fed uncomfortable in terms of easier conditions.
Interesting note: Interview featured on BBG with BofA’s Savita Subramanian where she says: “To me, the most encouraging number is if you compare today’s average maturity of debt on S&P balance sheets to that in 2008. Today, debt terms out at about, on average, 11 years. Back in ‘08, it was more like seven years.”
News this week includes Retail Sales on Wednesday, expected -0.8 from -0.6.
PPI also on Wed, expected -0.1 from +0.3. YOY 6.8 from 7.4. Core yoy 4.6 from 4.9.
Beige Book. Philly Fed and Housing Starts Thursday; Existing Home Sales Friday.
20-yr auction ($12b, reopening) on Wednesday. 10-yr tips ($17b) on Thursday.
Davos is this week. From the WEF meeting website: “Gov’ts must act as ‘investors of first resort’ to invite wider private-sector interest and investment in technologies and sectors with the highest potential to build the markets of tomorrow.”
Uh-oh.
https://www.weforum.org/agenda/2023/01/davos-2023-insights-to-read/
OTHER MARKET THOUGHTS
A lot to talk about. If you think there is some possibility of a 50 bp hike at the Feb 1 meeting, then the easiest trade is to SELL FFG3 at 9541 (settled 40.5). Many officials have blessed 25, including Bostic (non-voter/Atl, if CPI cools would lean 25), Harker (voter/Philly “25 appropriate going forward”), Barkin (non-voter/Richmond), Collins (non-voter/Boston leans for 25). What happens if the market expects 25, but the Fed hikes 50. Stocks should break, 30-yrs rally?? Short term debt instruments will get hit. A sale of FFG3 here is an easy hedge for those long notes 5 years and in, or long stocks. Risk 2 bps to make 22.
There is plenty of press coverage regarding inverted spreads, but the one I flagged Friday is interesting in its simplicity. It covers the first half of 2024, so one year forward (and as you may have noticed, a lot can change with respect to market pricing in one year) and it’s a nice round figure. Namely FFF4/FFFN (9552.5/9653.5) settled -101. There are 4 FOMC meetings within this six-month period. The schedule for 2024 isn’t out yet, but I suspect the first 2024 meeting will be Jan 31. The Fed targets Fed Funds, it’s a six-month spread over 4 meetings, and it’s inverted almost exactly 100 bps.
Just to expand on this thought, let’s look at 6-month increments. FFF3/FFN3 spread is +59.25 (9566.75/9507.5). Of course, the front Jan contract is now pegged to EFFR at 433. So in the next 4 FOMCs the market estimates about 60 bps of tightening. Then FFN3/FFF4 is -45.0 (9507.5/9552.5). There is almost as much easing priced for the last four meetings of the year as there is tightening for the next four. It’s worth noting that July’23 contract is now the lowest on the FF strip at 9507.5, or 4.925%
I wanted to review a trade from the end of last year: Someone paid -2 (took 2 bp credit, buying lower strike) for SFRZ3 9550/9600/9650 c tree around 9552. I was chatting with a guy in the pit at the time who said this particular trader has a very high percentage of wins. In pit vernacular “He’s never wrong”. Anyway, I checked the trade on Friday, it was +6, but my friend told me the guy had exited at +4. Settlement price Friday was 6.25 vs 9560 (41.75/23.0/12.5). Net change was exactly as much in the call tree as in the futures!
SFRZ3 settled 9560, up just 0.5 on the week. The 9562.5 straddle continues to be shit upon, that is to say, compress, closing at 74.5 after having been sold heavily at 82 to 80.5 during the week. At the end of last year, just two weeks ago, SFRZ3 atm straddle was 100 with futures right around strike of 9550. Breakeven 3.5% to 5.5%. Now with the 9562.5^ at 74.5, breakevens have tightened considerably, 9488 or 5.12% to 9637 or 3.63%. The downside breakeven is exactly where the Fed’s end-of-year 2023 FF projection is. This decline in vol was, of course, instrumental in the profitability of the call tree cited above.
| 1/6/2023 | 1/13/2023 | chg | ||
| UST 2Y | 425.8 | 423.4 | -2.4 | |
| UST 5Y | 371.2 | 361.1 | -10.1 | |
| UST 10Y | 356.9 | 350.9 | -6.0 | |
| UST 30Y | 369.2 | 361.9 | -7.3 | |
| GERM 2Y | 258.1 | 259.2 | 1.1 | |
| GERM 10Y | 221.0 | 216.8 | -4.2 | |
| JPN 30Y | 159.7 | 161.0 | 1.3 | |
| CHINA 10Y | 283.5 | 289.8 | 6.3 | |
| SOFR H3/H4 | -96.5 | -97.5 | -1.0 | |
| SOFR H4/H5 | -101.0 | -101.5 | -0.5 | |
| SOFR H5/H6 | -6.5 | -8.5 | -2.0 | |
| EUR | 106.44 | 108.33 | 1.89 | |
| CRUDE (CLH3) | 74.04 | 80.11 | 6.07 | |
| SPX | 3895.08 | 3999.09 | 104.01 | 2.7% |
| VIX | 21.13 | 18.35 | -2.78 | |
Deceleration in prices. Except eggs
January 13, 2023
–$/yen 128.50, having traded 128.11 earlier, the lowest level since June, as talk of the BoJ abandoning YCC circulates. 10y JGB breached the 50 bp cap though BOJ buying has brought it back down to that level. As a BBG report previously said, “Japan is the largest exporter of capital to the world” so the idea of yen strength along with higher yields might make that capital less available globally.
–Wildly large ranges on the CPI release yesterday even though data was exactly as expected: -0.1% mom, yoy 6.5, with Core 5.7. USH contract had an instant 2 point range. Ultimately yields fell with tens down 10 bps to 3.453% and the 30y down 9.7 bps to 3.58% after solid auction results. At the Feb FOMC, EFFR is expected to rise to 458 bps, exactly 1% higher than yesterday’s 30y yield.
–What happens when the market tests the resolve of the central bank? We’re seeing sharp dislocations in Japan, but in the case of the US the market has consistently priced easing later this year even as Fed officials telegraph resolve on the inflation fight. On the SOFR curve, new lows once again in near one-yr calendars: H3/H4 at -109 (9515.5/9624.5), M3/M4 -158.5 (9512/9670.5) and U3/U4 -168.5 (9531.5/9700). The latter is the lowest on the strip and a new low for the cycle. It is NOT forecasting good things in the US economy.
–Interestingly, if one looks at the FF futures curve, the conclusion might be that the market believes the Fed. After all, the expiring (Jan) FFF3 which is already pegged to EFFR at 433 bps is 9566.75 and FFF4 is close to the same price at 9562. However, FFG3 is 9540.5 and FFG4 is 9585.5 (G=Feb). In the wake of CPI data, the market has cemented expectations for a 25 bp hike on Feb 1 (expected final settle for FFG3 is 9542.9,and the contract was trading 41 yesterday). So, the FFF3/G3 1-month spread at +26.25 isn’t at all surprising. However, in the beginning of next year FFF4/G4 is -23.5, so we’ve already penciled in an ease for next Feb. Looked at in terms of 1-yr calendars, Jan23/Jan24 is +4.75 while Feb23/Feb24 is -45.0.
–Quick note on SFRZ3, which settled +6 at 9571.5. Large block sale from Wed morning at 61.5 is 10 underwater… for now. Fed SEP year-end 2023 FF projection from the Dec FOMC was 5.1%. SFRZ3 is consistent with 4.25%. As I’ve mentioned recently, before year end, SFRZ was around 9550 and the atm straddle was 100. As the atm strike moved to 9562.5 the straddle was sold repeatedly, bringing it to 81. Yesterday the 9575 atm straddle settled 76, as all premium compressed post-CPI.
If it LOOKS like a conspiracy…
January 12, 2023
–It’s almost like the plot of James Bond’s Casino Royale. Hackers hatch a plan to ground the US airline fleet by corrupting NOTAMs (Notice to Air Missions). This will, of course, cause a massive stock market sell-off, so the hacker group first buys puts on airline stocks and other sectors. The plan goes as expected at first, and in a coincidence which should only accentuate profits to shorts, news leaks that the President had Classified documents at private residences. Treasury immediately takes action to avert panic and otherwise thwart the evil plot. News outlets are told that it’s a simple computer glitch. The Plunge Protection Team is unleashed with an added twist of planting hints that CPI will show deflation. (BBG article this morning: Traders lose trust in CPI security in wake of volume shock). SPX closes on the high. Le Chiffre, having been financially crushed, take a hit of his inhaler.
–The big data point today is, of course, CPI expected m/m at -0.1% with Core +0.3%. YOY expected 6.5 from 7.1 last with Core 5.7 from 6.0. A lot of large trades yesterday, including a block sale of 45k SFRZ3 at 9561.5 (settled 9565.5; appears new as OI +57k). Buyer of 100k SFRZ3 9800/9850cs 1.5 (settled 1.0; also new). Buyer of at least 30k SFRF3 9512.5/9518.75/9525c fly for 1.75 to 2.0; settle 2.0 ref 9511.5 and expires Friday. Buyer on block SFRG3 9518.75/9543.75 c 4×5 using prices 4.5 and 1.0 (settled 3.5 and 0.5; new). 24.9k x 31.2k. Option plays in rates mostly benefit from a gentler Fed. The large and tight Jan SOFR call fly looks for a modest rally to 9518, while Citi recommended buying a Jan SOFR strangle for a big move one way or the other today. I think they cited 9500/9512.5 strangle, but with SFRH3 having settled 9511.5, I will just note that SFRF3 9506.25p settled 2.5 and the 9518.75c (mid-strike of the fly) settled 1.0. Breakeven on that strangle is 9502.75 and 9522.25. I am not a buyer.
–On the SOFR curve, new lows in near one-year calendars. U3/U4 settled at a cycle low -162.5 and H3/H4 at -104. Even a spread like H3 to Z3 is indicating more than 50 bps of ease over latter half of the year (settled -54; 9511.5 and 9565.5). The rally in stocks is making Powell’s job harder, but no matter what, SFR contracts later this year are convinced the Fed will cave and ease. SFRZ3 9562.5 straddle has been under heavy selling pressure; settled at a new low of 80.5 vs 9565.5. EURCHF broke out to a new high. Risk on. By the way, Alcoa (AA) also showing signs of a breakout, holding above 50, due to hat demand.
Traders Lose Trust in CPI Data Security in Wake of Volume Shock
Stick to our knitting
January 11, 2023
–Powell declined to expand the Fed’s role in combatting climate change, and claimed that dual mandates of unemployment and price stability provided more than enough of a challenge. Oh, and throw social justice in there. NFIB small business optimism printed at 89.8, “…marking the 12th consecutive month below the 49 year average of 98.” Yesterday’s print is just above last year’s low of 89.5, and well below the covid spike plunge in 2020 to 90.9. What to conclude? That small business is more worried about ‘helpful’ government policies than about a massive pandemic threatening all of humanity? That couldn’t be it. There must be a glitch in the data.
–Yields jumped yesterday despite a solid three-year auction. The ten year rose 10 bps to 3.615% in front of today’s auction. CPI tomorrow.
–SFRH3/SFRH4 settled -98 bps (9511.5/9609.5), actually up 5 bps from Monday’s settle of -103. Three weeks until the next FOMC, and the consistent, official message is that of a terminal rate around 5% and NO subsequent easing. The market is consistently saying we’ll be at 4% or lower by next year. Must be a glitch in the data.
–Relentless selling of SFRZ3 9562.5^, yesterday mostly at 82 (10k), settled 81.5 vs 9562.0. Open interest in the call is now 52k and put is 83k. Before the end of the year, SFRZ3 9550^ was 100 bps. That now settled 81.75. Sales in this straddle appear to target 4.25 to 4.5% for year-end FFs, though vols were awfully high with the Fed dialing down future rate moves.
I like the idea of lending at 20%
January 10, 2023
–Powell comments today followed by the three year auction. Large reversal in ESH yesterday as it made an early high of 3973.25 (+57.75) only to go negative by the end of the day with a late print of 3912.00 (-3.50). Dollar index at its lowest level since the middle of last year, and nearing the 50% retracement from mid-2020 low to last year’s high. The halfway mark is 102.18 vs 103.19 late yesterday.
–New lows in some of the near one-yr SOFR calendars. The lowest is Sept’23/Sept’24 which fell 2.5 to -160 (9529.5/9689.5). While Fed officials parrot the need to keep rates high this year to make sure inflation is vanquished, the market simply won’t accept the idea that the Fed will maintain inflation vigilance. A couple of weeks ago there was a large buyer of SFRM3/U3 at -19, and it quickly rallied to -12.5. If the Fed holds rates steady, this spread should approach zero. Yesterday it fell 2 to -19.5.
–Consumer credit released yesterday: “In Nov consumer credit increased at a seasonally adj annual rate of 7.1%. Revolving increased at a rate of 16.9% while non-revolving increased at an annual rate of 3.9%.” I suppose it’s related to holiday shopping, or maybe the jump in revolving indicates a stretched consumer. The St Louis Fed website has a chart on Credit Card interest rates on accounts assessed interest. The latest: 20.4%. Very few hedge funds can boast returns of 20%. The Fed’s plan is to raise rates, push unemployment up, thereby tamping down on consumer demand, all of which will suppress inflation. 20.4%.
Markets focused on signs of economic weakness
January 9, 2023
–The reaction to Friday’s data left us with an additional ‘ease’ priced into reds. June’23 is the lowest contract on the SOFR curve at 9506.5, up 8.5 on the day. But one year forward, SFRM4 was up 29.5 at 9605, and the strongest contract was U4, up an astonishing 30.5 bps to 9681.5. SFRU3/U4 is the lowest 1-yr calendar, and posted a new low for the cycle at -157.5 (9524/9681.5). YOY hourly earnings in the employment report were up only 4.6%, and the workweek fell to the lowest of the year at 34.3 hours. All this while the unemp rate printed 3.5%, pinned to historic lows with NFP +223k. Non-mfg ISM plunged below 50 to 49.6, leaving both Mfg and Service ISM sub-50.
–The treasury curve steepened, with twos down 19.1 bps to 4.258% and 5s down 20 bps to 3.712%, while tens fell ‘just’ 15 to 3.57%. EFFR is currently 4.33%, so about 5/8% of negative carry on the 5y note, and it’s going to get worse after another hike on Feb 1. On Friday Pozsar of CS said the Fed is likely to restart QE by June. If no one else can be relied upon to buy new US debt, we’ll just do it ourselves. 2/10 ended at -67 bps, which is still down 20 bps from what ultimately turned out to be a false breakout on Dec 28. A close above -47 would be technically positive.
–Powell speaking tomorrow. Auctions kick off with 3s tomorrow, followed by 10s and 30’s Wednesday and Thursday. CPI Thursday.
CPI week
January 8, 2023
From last week: “In terms of year end prognostications, SFRZ3 settled 9547.0 or 4.53%, and the 9550 straddle at 100. There. That’s the prediction: 4.5% overnight rate (maybe 25 bps above the current target) plus/minus 100.”
The range on SFRZ3 on the first week of the new year was 9533 to 9562.5. Coincidentally, that was the range on Friday. Settle was 9559.5. Net change on the week was +12.5. The 9550 straddle settled 86.25, down nearly 14 on the week and the 9562.5 straddle settled 86.5 as implied vol was hammered out of rate markets.
Fed officials continue to indicate a terminal rate above 5% and resolve to keep rates high until they’re confident that inflation is unambiguously trending to target. The lowest FF contract is June’23 at settle of 9505 or 4.95%. On Dec 30 it settled 9503. While Bullard said data will determine whether the Feb 1 hike is 25 or 50, the market leans towards the former with FFG3 settle of 9536. A hike of 25 should result in a final settle of 9542.9, and 50 should be 9518.8.
Powell speaks on Tuesday at the Sveriges Riksbank Symposium on Central Bank Independence. CPI is released on Thursday, expected 6.5% yoy from 7.1 last, with Core 5.7% from 6.0 last. Financial conditions have clearly eased over the past several FOMC meetings. I looked at FOMC dates of 9/21, 11/2 and 12/14 and took the 3-day averages of those days and the following two for the ten-year yield, SPX and DXY. GT10 3.745%, 4.138%, 3.47% and now 3.57%. SPX 3747, 3750, 3981 and now 3895. DXY 111.7, 111.7, 104.4 and now 103.90. Certainly things are easier now than Sept and Nov. Powell will likely lean against those trends.
On the SOFR curve, June’23 is the lowest contract at 9506.5, again, near 5%. The June’25 contract is more than 200 bps lower in yield at 9712. Most of that expected decline is in the first year, as SFRM3/M4 spread settled -144 (9506.5/9650.5). The Fed wants inflation down, while the market sees a significant drop in economic activity due to high funding rates.
From Chris Long on Linked In (link at bottom)
I’ve watched ISM Manufacturing Prices Paid for a long time, and while I know that it doesn’t track consumer prices perfectly, eventually it does have an impact. After today’s surprisingly below-expectations Average Hourly Earnings (along with a downward revision to the prior month), more Fed hikes seem destined to lead to a policy error – hiking too fast without waiting to see the impact of that hiking. The reversal and sharp rally in the fixed income market today tells me that the market is already figuring this out. [Avg Earnings yoy were 4.6% vs expectations of 5.0%. Workweek hours at 34.3 were the lowest level of 2022]
Below is a chart of ISM Mfg and Services. Both are now below 50. The only question now is how much political pressure will the Fed be able to take in its quest to quell inflation before having to ease. The market obviously thinks easing will occur in 2H. There was a block trade on Friday making the opposite case. FFK3/FFF4 calendar spread traded -43.75 in size of 4800. Settles were 9506.5 and 9551.5 so -45.0. A buyer of this spread would hope for no easing in the five FOMC meetings embedded in this period: June 14, July 26, Sept 20, Nov 1 and Dec 13. Rather, the idea is that current perceptions of an ease over that period dissipate, which would cause FFF4 to grind lower in price. On the other hand, imagine a scenario where the Fed hikes at the next couple of meetings, and economic fissures give way to gaping cracks. Possible for the Fed to ease 25 at every meeting in the last half of the year?
Similar trades took place in Dec’23 SOFR options. For example, SFRZ3 9537.5/9512.5/9500 broken put butterfly was bought for 7 and the 9512.5/9487.5/9475 broken p fly was bought for 5. The former has a breakeven of 9530.5, max value at 9512.5 and makes 5.5 at any level below 9500. Downside trades in short term futures tend to be structures that are targeting specific FF levels. Upside trades have, on balance, been more aggressive.
Zoltan Pozsar released a note Friday expecting the Fed to restart QE in June. “Don’t expect the put under gov’t debt to prop up risk assets: Unlike QE in the context of low interest rates and a risk asset put, the coming QE will be in the context of Treasury market dysfunction. The coming QE will aim to police swap spreads at high levels of interest rates, not to depress yields to inflate risk assets.”
The problems are obvious. EFFR at 4.33% is above every rate on the treasury curve past the 2y, which ended the week at 4.26%. A change in policy from the BOJ will make JGB yields more attractive, conceivably pulling capital away from US treasuries at the margin. This week we have 3, 10 and 30y auctions starting Tuesday, $40b, $31b, $18b. As noted above, yields are generally lower than peaks associated with Sept and Nov FOMC meetings. This week’s auctions may give clues as to whether Pozsar’s thesis is correct.
.
| 12/30/2022 | 1/6/2023 | chg | ||
| UST 2Y | 440.3 | 425.8 | -14.5 | |
| UST 5Y | 397.0 | 371.2 | -25.8 | |
| UST 10Y | 384.0 | 356.9 | -27.1 | wi 357.5/56.5 |
| UST 30Y | 393.3 | 369.2 | -24.1 | Wi 369.5/69.0 |
| GERM 2Y | 276.4 | 258.1 | -18.3 | |
| GERM 10Y | 257.1 | 221.0 | -36.1 | |
| JPN 30Y | 160.1 | 159.7 | -0.4 | |
| CHINA 10Y | 283.9 | 283.5 | -0.4 | |
| SOFR H3/H4 | -77.5 | -96.5 | -19.0 | |
| SOFR H4/H5 | -88.5 | -101.0 | -12.5 | |
| SOFR H5/H6 | -6.5 | -6.5 | 0.0 | |
| EUR | 107.03 | 106.44 | -0.59 | |
| CRUDE (CLG3) | 80.26 | 73.77 | -6.49 | |
| SPX | 3839.50 | 3895.08 | 55.58 | 1.4% |
| VIX | 21.67 | 21.13 | -0.54 | |
They’re not buying puts and they’re not buying foward SOFR calendar spreads
January 6, 2022
–NFP today looking for 202k. Jobless Claims yesterday were only 204k and ADP surprised to the upside at 235k vs 150 expected. ISM Services expected 55.0 vs 56.5 last.
–Fed continues to guide toward higher for longer with Esther George looking for terminal above 5%; Bullard said data will determine whether next month’s FOMC is 25 or 50 (market currently leaning towards the former). The curve flattened with the two-yr yield up 6.4 to 4.449% and tens up only 1.3 to 3.72% (spread -72.9, much closer to the recent low of -84.5 than the high of -47.0). On the SOFR curve Z’23 and H’24 were weakest contracts settling -8.5 (9539.5 and 9580.5). While these contracts adjusted to hawkish data and rhetoric, it’s instructive to note that the spread is still -41. The attached chart reflects market sentiment: SFRH3/M3 rose 1.5 bps to a new recent high of +7.0 (9505/9498) while the same spread one year forward, SFRH4/M4 fell 1 bp to -40.5.
–At the same time, as near contracts decline in price, atm straddles are compressing. For example on Friday SFRZ3 settled 9547 and the 9550 straddle settled 100. Yesterday SFRZ3 settled 9539.5 and the 9537.5 straddle at 90.5. Not exactly indicative of fear to the downside; there is no mad bid for puts in a declining market. Just the opposite. On Friday SFRZ3 9550p 51.5, and with a 7.5 decline in futures (47 to 39.5) the same put settled 51.0 yesterday. Also decent selling in treasury vol in front of today’s data. Example -5k TYH 111/115 strangle at 63. Settled 63 ref 113-005 (32, 31). On Wednesday vs 113-06 this same strangle was 1’03 settle (35, 32). Again, no bid for puts.
Image: SFRH3/M3 in white. 3m calendar spread. Red is one-year forward, SFRH4/M4. Near spread goes +tive bid with Fed convincing mkt ‘no near term ease’. The market is responding with an even more INVERTED frd sprd. ‘hike more now you’ll have to ease more later’
Hikes give way to cuts. That’s just how it is.
January 5, 2023
–Early exit sale of 50k TYG 113.5/114.5 call spread at 26. Open interest down 37k in both strikes; settled 23 ref TYH3 113-06. Implied vol down fairly hard in short end with straddles down 2 to 3.5 bps. Fed minutes…higher for longer? Honey badger don’t give a sh-t. SFRM3/SFRZ3, the six-month calendar for the end of the year, settled unchanged, but it’s still inverted by 45 bps (9503/9548). The most inverted one-year calendar remains U3/U4 at -139.5. That spread actually declined by 7.5 yesterday, with SFRU3 -1.5 to 9518.5 and U4 +6 to 9658.0. Recent low has been -155. The market respects the Fed’s resolve…for the next few months. For example FFN3 (July Fed Funds) settled -1 at 9502.5 or 497.5 bps, which is 5/8% higher than current EFFR of 433. OK Fed, we KNOW you want to hike more in Q1. But after that, over 100 bps of ease is priced by July’24, with FFN4 9613.5 or 386.5.
–ISM Mfg yesterday price component was just 39.4, consistent with bad times. I have helpfully overlaid M2 yoy growth on the chart below.
–Today brings employment data teasers, with ADP expected 150k and Jobless claims 225k. Pre-empted by AMZN announcement of 18k job cuts and Salesforce cutting 10% of staff. NFP tomorrow expected 200k, with ISM Non-mfg PMI expected 55 from 53, a stark contrast to yesterday’s fall in Mfg PMI to 48.4.
Focus on FOMC minutes
January 4, 2023
–Today’s news includes ISM Mfg expected 48.5, and FOMC minutes in the afternoon, the latter of which has been hyped as a market mover.
–Atlanta Fed GDP Now revised up to 3.9% for Q4, but a St Louis Fed report flagged by ZH questions whether the US is already in recession by looking at state data (SCI) State Coincident Indexes. The punchline: “So, where are we now? In Oct ’22, 27 states had negative growth in the SCI. That would exceed the six-recession average of 26 states but would fall short of the outlier-adjusted estimate (excluding 2008) of 29.” Just like always, some things are good and some things are bad.
https://www.stlouisfed.org/on-the-economy/2022/dec/are-state-economic-conditions-harbinger-national-recession
–Ever since rallying to -47 a week ago, 2/10 spread has been easing back lower, now -61. Yields generally fell yesterday, with tens down just over 5 bps to 3.788%. Solid rally this morning with TYH up 21.5/64s to 113-10. Yesterday there were a couple of short end trades suggesting the Fed is close to done. SFRM3 9525/9550c 1×2, lower leg bought for credit of 2 bps, settled 13.75/7.5 so credit of 1.25 ref 9504. Also a buyer of >20k SFRG3 9506.25/9518.75/9531.25 c fly which settled 3.5 vs SFRH3 9508.5. Middle strike is target, with a yield of 4.8125. Current EFFR is 4.33. Hike of 25 in Feb with another 25 expected in March would likely benefit the fly.
