The Road to Recovery

May 24, 2020 – Weekly comment

Last week we had Maria Bartiromo’s morning show streaming, and her guest was gushing that he had his best month ever.  He had something to do with RVs (recreational vehicles); the company might have been, an Airbnb for RVs. 

Of course!  Can’t fly.  Have time off.  Shelter at home.  Just drive the (motor) home across the country!

Yes.  That, my friends, is a picture of the Thor Motor Coach Tuscany, which you can pick up for about $300k.  And, gas is cheap. Looks comfortable enough, but I’d rather fly.  According to RVshare, prices are $160 to $250 per day.  Of course, Chicago is relatively close to the RV capital of the world, Elkhart, Indiana, so maybe prices are slightly less expensive from this location.  It would be great if they made a movie with the RV storyline.  Oh, they already did.  ‘Lost in America’ from 1985.  Albert Brooks is passed up for a promotion as an advertising executive and convinces his wife to sell everything and travel the country in a Winnebago.

Since we’re on the subject, way back in the old CME floor days, a friend of mine rented a RV, hired a couple of strippers and a driver, and transported his clients from Chicago to the Indy 500.  I really don’t condone that sort of thing. I’d rather see the Kentucky Derby.  But if I said, at the time, that I didn’t harbor just a twinge of jealously mixed with admiration, I’d be lying. 

Anyway, back into the world of prices and interest rates.  The Fed’s Vice Chair Richard Clarida gave a speech last week outlining the Fed’s actions which led to a significant easing of financial conditions, “…buying some time until the economy can begin to recover, growth resumes, and unemployment begins to fall.” He said that his “projection is for the COVID19 contagion shock to be disinflationary, not inflationary…” both in the near and medium term.  Forward guidance.  He adds, when “we are confident the economy is solidly on the road to recovery, we will wind down these lending facilities at such time as we determine the circumstances we confront are no longer unusual or exigent.”  Right.  We all know how smooth the path to ‘normalization’ is after the drug-fueled liquidity surge.  Here’s a chart which indicates the remarkable job the Fed has done, helped by low energy prices.

Why it’s Winnebago! It ended Friday above $58, having nearly completely recouped the 75% covid drop.  Low finance rates.  Cheap gas.  It took over a year to recover from the late 2018 sell off.  The same magnitude rally in two months.  Breathtaking.

Perhaps the RV story is an appropriate parable of the US turning inward.  This was a week that China made moves to further stifle Hong Kong’s autonomy, with Trump warning the US would respond “very strongly”.  In my opinion, control measures by China will inexorably move from HK to Taiwan.  However, the US is curtailing its globalist instincts.

At the same time, the Fed is expanding its control measures as well, in the realm of financial markets.  Why should there be hedging of rates and risks?  Perhaps that’s why CME (-1.2%) and ICE (+0.3%) were flattish on a week where SPX rallied 3.2%. 

Eurodollar futures from EDM’20 to EDH’23, the next three years, are 20.5 to 36 bps, 99.795 to 99.64.  The two-year yield ended at 16.6 and the five-yr at 33.3 bps.  Biggest mover on the week was the long bond which rose 5.6 to 1.37%.  5/30 closed at 103.7, up 3 on the week, while 2/10 was barely changed at 49.3.  The upcoming week is somewhat light on economic data.  On Friday we’ll get PCE Core prices, expected 1.1% year-over-year.  U of M final 1-yr and 5-10yr inflation numbers for May are also released; the initial readings were +3.0% and +2.6%.  Much different from Clarida’s expectations.

Below is a nice visual of the Fed’s handiwork in terms of easing financial conditions.  TY vol has plunged from a high over 13 in March to 3.8 on Friday. I guess we’ll call it ‘reversion to mean’.  3-month libor has settled around 37 bps, having been as high as 145 in March.


Week over week change in EDU1 was -1.5 from 9981 to 9979.5 (this is still the high point on the curve).  EDU3 was -3.5 from 9959.5 to 9956.0.  Miniscule changes but the bias towards a steeper curve from rather flat levels remains.

It’s interesting to compare spreads in dollars, euribor and short sterling.  Here are M0/M1, M1/M2 and M2/M3 in $, € and £.  Dollars -11.25, +5.0 and +14.5.  Euribor -10.0, +1.0 and +5.5.  Sterling -11.0, +3.5 and +7.0.  All are equally negative in the front end of the curve, but the US diverges to somewhat higher deferred spreads, which I loosely perceive as an expectation the US will emerge from the virus slowdown somewhat more quickly. 

UST 2Y14.716.61.9
UST 5Y30.733.32.6
UST 10Y63.865.92.1
UST 30Y131.4137.05.6
GERM 2Y-72.8-68.04.8
GERM 10Y-53.1-48.74.4
JPN 30Y47.344.9-2.4
EURO$ M0/M1-13.0-11.31.8
EURO$ M1/M23.55.01.5
CRUDE (active)29.5233.253.73

Posted on May 24, 2020 at 9:41 am by alexmanzara · Permalink
In: Eurodollar Options

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