August up, September down
Sept 13, 2019
–Yields marched higher yesterday with tens +5.7 bps to 1.789%. Reds were weakest on the euro$ strip, closing -7.75. Core yoy CPI was stronger than expected +2.4% coming on the heels of yesterday’s +2.3 Core PPI. The ECB announced a 10 bp cut and €20B month QE. US stocks rallied and are within shouting distance of all time highs. The US budget deficit was $200 billion for August (a bit better than last year) but the fiscal ytd amount rose to $1.07 trillion (you might not want to call it overt fiscal stimulus, but that’s exactly what it is, and Trump wants to finance it at ZERO%). Although these bits of information don’t appear to justify an ease at next week’s FOMC, a 25 bp cut is completely priced. It’s now getting murkier after that. From a low of -85 bps earlier in September, EDU9/EDU0 spread closed at a new high yesterday of -56.75. EDZ9/EDZ0 settled -63 on 4-Sept and also closed at a new high yesterday of -42.5. So these spreads indicate a couple of eases over a year. In the near term, FF calendars have also rallied. For example, Nov/Jan which isolates the December FOMC closed at a new high of -11, less than 50/50 odds of an ease at that particular meeting.
–In terms of near ED pricing, EDU9/EDZ9 settled at a new high of -13.75. At first glance, that would seem to indicate only about 50/50 odds of an ease in Q4. However, it is more suggestive of being position driven as there’s been heavy liquidation of EDZ9 calls. As mentioned in the weekend write-up, Dec contracts are also the subject of year-end pressures, clearly reflected in EDZ9 vs FFF0 which had been trading around 34 but is now pressing new highs at 37.5. EDZ9/EDH0 settled -26.5 while EDH0/EDM0 settled at just -10, a new recent high. It’s tempting to conclude that EDZ9 is trading a bit “cheap” here. After all, the three month FF spread Oct/Jan is -26.0, suggesting certainty of one ease at either the Oct or Dec FOMC, while EDU9/EDZ9 is -13.75. I am not going to take that “cheap” bait at this juncture, though I could certainly see buying some cheap call structures on EDZ9. Limit the downside risk.
–Some prices for context (yesterday’s settles)
EDU9 9787.25 FFV9 9812.5
EDZ9 9801.0 FFF0 9838.5
EDH0 9827.5
EDM0 9837.5
EDU0 9844.0
EDZ0 9843.5
–Today brings Retail Sales expected +0.2%. Also, U of Michigan expectations, which includes a long term inflation survey, last at 2.6%. The long end of the treasury curve, of which buyers couldn’t get enough of last month, has turned decidedly finicky in September. Government supply, corporate supply, higher inflation readings, and central bank stimulus throughout the world, (Vietnam today) have conspired some to change their opinion about the relative attractiveness of 30 year US yields at 2%. Add in renewed discussion of 50 and 100 yr paper by Mnuchin… Keep those plates spinning. 30’s ended at 2.26% yesterday.
