9/11
September 11, 2024
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–The trading floor always respected the moment of silence on the anniversary of 9/11
–If the payroll data didn’t provide a clear-cut signal for 25 or 50, it’s quite unlikely that today’s CPI will. Expected 0.2% with Core also 0.2% on m/m basis. YOY 2.6 from 2.7 last with Core 3.2 from 3.2. Markets, as evidenced by another strong rally in SOFR and treasuries, are clamoring for forceful rate cuts to counter increasing economic weakness. SFRU5 (strongest contract on the strip) was up another 7 bps to 9712 or just 2.88%. SFRU4/SFRU5 is sub-200 bps (9511.25/9712) New LOW. Ten year yield dropping like it’s on Ozempic, down another 5.3 in front of today’s auction, to 3.644% (More on that below). What IS going to decide 25 or 50? Stocks. The trend in inflation is unambiguously lower. A stronger number today would not likely change that trend, but might have a negative effect on stocks, which are currently a bit lower at 5484.25, -18.75 on ESU4.
–ALLY financial was crushed yesterday, down 18% partially due to increased auto loan delinquencies. JPM fought back from a drop of 7% to close down 5.2%. Not all financials were hard hit, but remember, no matter what they TELL you, the Fed’s main concern is soundness of the TBTF banking system. Mandates -inflation and employment – are really 1(b) and 2(b)
–Some exits of SFRZ4 long calls and call spreads. Example 25k SFRZ4 9600c sold at 14.5 covered 9590.5, 42d. Settled 16.5 ref Z4 at 9594.0. Think about that for a second: breakeven given premium of 16.5 is 9616.5 or 3.835%. In FOUR months. Current EFFR is 5.33%, so breakeven is around 150 bps lower. The press is hand-wringing about 25 or 50 for Sept, but SFRU4/Z4 calendar made a new low -82.75 bps.
–TYZ4 settled 115-14+ with cash marked 3.644%. DV01 on the contract is ~$68. The low in April of 2023 (as regional banks were imploding) was 3.31%. High settles in the front contract around that time were 116-30 to 117. The difference between yesterday’s closing yield and the 4/6/23 low is just over 33 bps, or a bit over 2.25 points (assuming parallel shifts). So futures would likely take out the 117 level in significant fashion on a return to that cash yield.
