July 17. Powell and NFLX. We’ve seen this movie before…
–A couple of large one-year eurodollar calendar spreads: EDM9/EDM0 10.0 paid for 30k. This settled 8.5 on Friday and 10.5 yesterday. EDU9/EDU0 2.5 paid for 40k. This settled 2.0 on Friday and 3.0 yesterday. In EDM9/EDM0 Friday’s low of 8.5 equals the previous low, set Dec 27, 2017. The high in mid-May was 20.5. In EDU9/EDU0 Friday’s close of 2.0 was the low. The high in mid-May was 14.0. Both were new positions with open interest up in all four contracts. M9 +7k, M0 +10k, U9 +26k, U0 +38k.
–So Kashkari was out saying (again) that the Fed should stop hiking now: “…the bond market is telling us that inflation expectations appear well-anchored, the economy is not showing signs of overheating and rates are already close to neutral. This suggests that there is little reason to raise rates much further, invert the yield curve, put the brakes on the economy and risk that it does, in fact, trigger a recession.” Today, Powell testifies before the Senate panel. If Kashkari’s comments were to seep into Powell’s delivery, then surely steepeners like the euro$ spreads cited above would get the green light. I would note however, that Powell seems much more focused on possible imbalances (including elevated financial asset valuations and a hot labor market) which could grow and overwhelm the system.
–So Kashkari was out saying (again) that the Fed should stop hiking now: “…the bond market is telling us that inflation expectations appear well-anchored, the economy is not showing signs of overheating and rates are already close to neutral. This suggests that there is little reason to raise rates much further, invert the yield curve, put the brakes on the economy and risk that it does, in fact, trigger a recession.” Today, Powell testifies before the Senate panel. If Kashkari’s comments were to seep into Powell’s delivery, then surely steepeners like the euro$ spreads cited above would get the green light. I would note however, that Powell seems much more focused on possible imbalances (including elevated financial asset valuations and a hot labor market) which could grow and overwhelm the system.
–Red to blue euro$ pack spread settled at a new low of minus 4 bps, and red/gold at a new low of minus 1.625. Even if Powell doesn’t soften the idea of gradual hikes, further downside is probably limited in the short term. There are cheap ways to express steepeners through options; call or email for thoughts.
–On Friday, Nancy Davis of Quadratic Capital was on CNBC saying that the tech stock rally may be over (citing skew on big tech versus the broader market). NFLX out to prove her right; after releasing earnings which indicated that subscriber growth fell short, nearly $50 was lopped off the stock in after hours trading (which is approx 12% representing an evaporation of $20 billion).
