We need an intervention. On many levels
June 27, 2024
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–Solid 5y auction but yields rose on the day, with tens +7.8 bps to 4.316%. New Home Sales were weak at just 619k, vs expected 640k. Today brings final Q1 GDP, expected 1.4, Durables -0.1, Jobless Claims 236k and the 7y auction. All capped by the spectacle of the only presidential ‘debate’.
–Yen continues to probe new lows, ignoring repeated calls for an intervention. Micron’s (MU) earnings call disappointed, with the stock dropping 5.8% after hours.
–Everyone gets a trophy, which is to say that all the banks passed the Fed’s stress test. From the Fed:
This year’s hypothetical scenario is broadly comparable to last year’s scenario. It includes a severe global recession with a 40 percent decline in commercial real estate prices, a substantial increase in office vacancies, and a 36 percent decline in house prices. The unemployment rate rises nearly 6-1/2 percentage points to a peak of 10 percent, and economic output declines commensurately.
…the annual bank stress test showed that while large banks would endure greater losses than last year’s test, they are well positioned to weather a severe recession and stay above minimum capital requirements.
–And what if equities drop 50%? Game over for some banks without extraordinary gymnastics by the Fed (Simone Biles type stuff) except that the extraordinary has now become ordinary. It’s called moral hazard.
–Another 15k SFRH5 9675/9775cs bought for 4.5, total now about 140k. Settled 4.25 vs 9540. New seller of 7k SFRZ4 9512.5 straddle from 37.5 to 37. Settled 37 vs 9512. SFRM4 is still trading, and settled 9464.5 yesterday. Therefore, SFRZ4 is about 47 bps higher, roughly two eases. Z4 9537.5c settled 11.25, so straddle sale versus long call fully caps upside in the unlikely event that the gods decide to put the Fed’s stress parameters to the fire test.
SOFR strip was -8.5 to -9 from SFRU’25 to SFRU’28.
