April 6. We’ve lost the script
–Employment day. Nonfarm payrolls expected 190k, with yoy Average Hourly Earnings 2.7%. Powell then speaks at 1:30 EST in Chicago. I saw no indications of an early release of the text; that should be released at 1:30. I’m sure Powell will re-emphasize that the stock market is NOT the economy which would be negative for both stocks and bonds.
–Yesterday’s trade featured higher yields and lower vols as stocks continued to climb. Ten year +3.8 bps to 282.6. Green and blue packs both fell 4 bps. April euro$ midcurves expire one week from today. Green and blue atm April straddles settled at 9.5 and 10.0, both the 9712.5 line. TYM atm vol just 3.6.
–Once again I will note that April/June dollar spread settled at just 0.75 while EDM8/EDU8 settled 8.5. One month overlap of April dollars with the June FOMC so that contract should reflect odds of a hike for that one month, while June gets the whole enchilada. May/July FF spread settled 18 bps, so the FF market prices odds of a June hike around 75%. So, if there were no libor distortions then April/June should price about 2/3rds of the odds of a June hike, which would put the spread at about 11 or 12. Makes EDM8 look somewhat expensive, or, makes EDM8/EDU8 appear high at 8.5. Obviously the distortions are hard to handicap, which should be of concern to the Fed.
–Speaking of volatile distortions, the President, as is his style, doubled down on the Chinese tariff proposal which others in the admin have tried to soften. As a result, stocks took a tumble early this morning, erasing yesterday’s gains. For a long time, markets ignored the political arena, but this year that changed, and has been accentuated by the apparent loss of influence of the steady Gen’l Kelly. Yesterday, Trump ignored prepared remarks related to taxes. He has generated confusion about US military plans in Syria. He has lashed out at big tech while previously having basked in the paper gains that the sector provided. Trump is going to need another scapegoat. You’ll notice that Mnuchin seems to be keeping his head down recently. Current targets are tech and China, but soon enough that will shift to the Fed. In an era where national leaders are being tossed in jail in comparable frequency to former Illinois Governors, (S Korea former president sentenced to jail, former Brazil president Lula being arrested) the political environment in the US could get, well… stormy.
