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!
