July 18. Cyber-safety bid
–Not much reaction to Powell’s testimony yesterday although some parts of the eurodollar curve notched new lows. For example, red/gold ED pack spread fell 0.25 bp to close at a new low of -1.875. Implied vol continues to be smothered; at or near new lows across the curve. Powell reminds us that he has JUST TWO JOBS, prices and the labor market. Monetary policy on auto-pilot… Ten year yield essentially unchanged at 2.858%.
–Nasdaq floats to new highs despite NFLX stumble, and Bitcoin surged yesterday as well. Flows are somewhat puzzling, not into ‘safety’ because gold is at a new low this morning (as is copper) and treasuries are nearly unchanged. New low in CNY now at 6.7183. China’s stocks under further pressure. Dollar index near new highs. Italian bank index (IT8300) slumping again and appears as if it might re-test lows made in late May/early June. Saw a BAML note yesterday that said SPX would be down on the year if FANNG names were excluded. It’s a cyber-safety bid; not sure if that should make the broader market comfortable or uneasy.
–Focus on the neutral rate for funds is sharpening. Along with Powell’s comments yesterday, Pimco’s missive says it’s “somewhere between 0% and 1% for the real funds rate, which translates to a 2%-3% nominal rate if inflation is at the 2% target.” It continues, “…a new useful table in the Fed’s latest Monetary Policy Report that lists econometric estimates of the neutral real rate from seven studies, mostly by Fed economists, confirms just that, The seven point estimates of the neutral rate range from 0.1% to 1.8% with a median of 0.7%. Assuming 2% inflation, this is very close to FOMC participants’ 2.9% median estimate of the so-called long run fed funds rate…”
–Large trades yesterday include new buy +40k EDU9 9737/9775/9812 call tree for 4.0 (11, 5, 2). There continues to be a large amount of 2×5 put structures trading further out the curve. Example: EDZ0 9637/9600p 2×5 trade flat (+20k and -50k) appears to be rolling short puts to lower strikes. New high settle yesterday in EDU8/EDZ8 at 21.5; large buyer +35k at 21 yesterday.
