Not stressing about banks….stressing about direct US war
June 26, 2024
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–Early Tuesday Fed’s Bowman said inflation risks means she doesn’t see an ease in 2024; shifted forward to 2025. 2/10 squeaked out a new ytd low at -49.6, but not much change in SOFR calendars. SFRU4/U5 remains the most inverted at -107, actually up 0.5 on the day (9485.5/9592.5). Net changes on both the SOFR strip and treasuries were miniscule. SOFR from -0.5 in fronts to +1.0 in blues. Ten-yr yield down less than 1 bp at 4.238%.
–Today’s news includes New Home Sales, expected 633k from 634k last. Peak in 2005 was 1.389m. Low in 2011 270k, then a steady rise until the covid spike of a little over a million. Currently back to 2019 levels (but population is larger). 5y auction. Fed releases bank stress test results. KRE, the regional bank etf, ended at 46.93, down 1.4% on the day. This year, the low has been defined by three lows at or just under 46; a close below would be significant.
–Another 30k bought in SFRH5 9675/9775cs for 4.75, bring total to about 125k. Another interesting, though much smaller trade, is a new buyer of 5k SFRH5 9600c vs 0QH5 9700c for 0.5 (buying H5). Settles: 15.75 vs 9546.5 in H5 and 15.25 vs 9619.5 in H6. Similar goal as the plain call spread…works best with rapid, front-loaded easing. SFRH5/H6 currently -73 while strikes are -100, obviously a parallel upward shift in the two contracts would put H5 calls in the money faster. Unexpected, rapid ease would cause the futures spread to move more positive.
–Q1 GDP released tomorrow, final estimate, expected 1.4%. With a price deflator of 3% it’s nominal growth of 4.4%, about 100 bps lower than Fed Funds. Restrictive…except that Q2 GDP as estimated by the Atlanta Fed is 3.0%, so nominal above FFs. If Fed funds represent the first hurdle of capitalism, then a nominal growth rate above financing costs still pushes the cart forward.
–The Biden admin said the US “…may lift restrictions on the deployment of US military contractors in Ukraine so that they can maintain and repair weapons systems provided by Washington.” Another incremental step in removing ‘proxy’ from US war. This, after Russia blamed the US directly for Crimea attacks over the weekend which used US controlled missiles. Dangerous escalation.
