Pay now or pay later

May 6, 2022

–Tweet by @jasongoepfert that was going around late yesterday:
“There have been 2 days in the past 25 years when S&P futures were down 3% and 10-yr treasury futures down 1%: October 9, 2008 and March 18, 2020.
Someone is blowing up, and this is forced liquidation.”
–I don’t know if the ‘blow-up’ rumor is true, but I do know that any forced exits are occurring in an environment of reduced liquidity.

–SPX down 3.56% yesterday, Nasdaq Comp -5.0% and DJIA -3.1%.  Tens rose 15 bps to 3.064% (at futures settlement time).  The curve was steeper, with 2’s up 10.2 bps to 2.716% and 30s up 16 to 3.15%.  EDM3 eurodollars are still the cheapest on the strip, settling at 9635.5 or 3.645%, down 13 on the day.  That price is consistent with FF target 3.25-3.50%.  The current target is 0.75-1.0%.   There are 9 FOMC meetings (including June 2023, just after the contract expiry).  So that would mean 250 bps worth of hikes over nine meetings.  On a linear basis, that’s a bit over 25 bps per meeting.  Doesn’t seem crazy.  Of course in the last cycle the peak was 2.25 to 2.5%; the last hike was on Dec 19, 2018.

–There was a fair amount of long put spread liquidation in euro$’s, for example a seller of 25k EDZ2 9818.75/9800ps at 17.25.  However, total EDZ2 open interest only fell 30k.
  –Here are changes in front ED straddles, from Monday’s close to yesterday’s close.  Monday, EDM2 9812.5^ 21.0 vs 9810.  Yesterday 9.5 vs 9814.5.  EDU2 9725^ 62.0 vs 9725. Yesterday 44.5 vs 9730.0.  EDZ2 9675^ 93.0 vs 9676.0.  Yesterday 74.5 vs 9677.5.  Just looking at these declines, one might say that the Fed’s message was well rec’d and expected…not much to see here.  However, there are a lot of embedded economic fragilities in the economy being reflected by both stock and bond prices. 

–What does the Fed do now if there’s another LTCM type blow-up?  Ease?  Pull the banks together to bail out the offender?  Stop balance sheet changes? It might just be that asset markets have to find a new level without the Fed stepping in. 

–Employment number today with NFP expected 400k and the rate expected 3.5%.  Speeches by Williams and Bostic, with Waller and Daly post-close. Minor note: Unit labor costs yesterday reported at +11.5%.  If inflation is 8 to 8.5%, that would suggest a headwind on profits, a shift from capital to labor (which tends to resolve in job cuts).  At the end of the day, Consumer Credit is released, expected +$25 billion from a whopping $41.8b in Feb.  On that note, I’m going with CHARGE IT in the Kentucky Derby, to win!

Posted on May 6, 2022 at 5:08 am by alexmanzara · Permalink
In: Eurodollar Options

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