Spite
May 7, 2025
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–The big news is a meeting between US and China trade delegations (announced post settles). Obviously the abrupt jolt to trade terms has hurt both countries. However, China has advised the population to make shared sacrifice. The US hasn’t. I wouldn’t be looking for any quick resolutions.
–PBOC cut the 7-day reverse repo from 1.5 to 1.4%. The Fed meets today and is expected to leave rates unchanged. In my opinion there was enough evidence to cut at this meeting even though PCE prices are somewhat over target (Core PCE yoy 2.6%). If the Fed were to cut, EFFR would go to 3.83%, still leaving real rates around 1.25%. The hard data hasn’t given Powell an easy invitation to cut, but the soft data has. (New report says US individual Chapter 7 bankruptcies up 16% in April). WSJ tactfully suggests the Fed is “waiting for clarity”. Both China and Powell are responding to Trump’s threats in the same way: spite.
–Paul Tudor Jones opined yesterday there’s a 10% chance AI wipes out 50% of humanity in the next 20 years. India/Pakistan are trying to get a head-start. Trade data released yesterday for March suggests stockpiling occurred. Consumer Credit released post-FOMC for March, may indicate same (but the debt still lingers).
–Yields fell somewhat after Monday’s rise. Tens down 3.5 bps to 4.307% after a strong auction (4.353 at cut-off and actual result 1.1 bp thru at 4.342%). Wi at futures settle was 4.317%. Thirties auctioned tomorrow. The 2y yield fell 5.1 bps to 3.785% (just more than half a percent below current EFFR). On the SOFR strip SFRH6 thru Z6 were all +6.5 (9668.5, 9681.5, 9687.5, 9687.5). U6 and Z6 are tied for peak position. A couple of the near 1-year calendars made new lows as reds outpaced the fronts. For example, U5/U6 settled -71, down 5 bps. The front 1-yr calendar, SFRM5/M6 remains below -100 at -102 (9579.5/9681.5). FFN5/FFN6 settled -108. Eases are being pushed back.
–Seemed to be a consistent (if modest) theme of call spread buying. Example, new buy 25k 0QU5 9725/9775cs for 9.75 to 10 (helping to push U5/U6 lower; some bought vs selling N5 9675c). Settled 10 vs 9687.5; pay 1 to make 4. SFRU5 9675/9750cs 4.75 paid 25k (settled there ref 9616.5). One other interesting small curve trade: SFRH6 9725/9825c vs 2QH6 9712.5/9812.5cs 0.5 paid for H6 in 4k. SFRH6 settled 9668.5 so 56.5 away from lower strike, while SFRH8 settled 9659.0 or 53.5 away. The 2-year futures spread is thus 9.5 bps. A Fed pivot toward aggressive ease would likely cause the futures spread to widen significantly. Consider the Euribor curve: Yesterday, ERM5/ERM6 settled negative 30.5. But ERM6/ERM7 settled positive 30.5. So, M5 and M7 settled at the exact same price of 9800.5, while M6 was 30.5 higher at 9831.0. ERM8 settled 9774.0. So on the bor curve, M6 to M8 settled +57 compared to SFRH6/H8 at +9.5.
https://x.com/AlexManzara/status/1919857270222893432
