Stormy
May 23, 2019
–Weakness this morning in equity futures, especially the small cap Russell (RTYM9) which is testing last week’s low, currently at 1520. Oil is also testing last week’s lows with CLN below $61/bbl. The realization of no quick resolutions to the trade impasse has settled over the markets. Treasuries are bid; with June option expiration coming Friday, it appears as if the 125 strike could come into play, TYM9 currently 124-205. Apart from trade issues, the debt ceiling is starting to get some attention, with Mnuchin warning of a late-summer default if the limit isn’t raised. And, with european elections coming up, EUR is pressing new lows. One of the analogies that I find is overused is “the perfect storm” but what the hell, this could be it. Yuan weaker, Turkish lira weaker.
–Summaries of the Fed minutes concluded there would be no rate cuts for ‘some time’. May 1 to July 31 is 13 weeks, or 91 days. Those are FOMC dates, with another one in the middle on June 19. That qualifies for some time. Will a meeting between Trump and Xi in late June keep the Fed on the sidelines in June? Probably. The July/Aug Fed Fund spread settled -1.75 yesterday. Anything above -2 is probably a sale [THIS IS NOT RESEARCH OR A RECOMMENDATION]. At the end of December Tesla was 375. Yesterday it ended at nearly half that level, closing at 192. Sentiments change. I think I saw a BBG headline saying that an extended trade war is now becoming a base case for many forecasters. I think base case is pretty much the opposite of transient.
–By the way, the ten year treasury to inflation-indexed note spread is at a new recent low of 180 bps, not having been this low since late January. It started the year around 170, firmed to nearly 2% as stocks recovered, but is now fading again. This Fed has fixated on inflation expectations, whose decline is just another headwind. In the storm. That’s coming. I’ll stop now.
