Dislocations in search of equilibrium
April 3, 2020
–Some of the keys for improved market stability would be a weaker dollar, a decline in libor, a decline in vix, somewhat higher oil prices. We’ve seen adjustments in some markets, but can’t seem to get the entire picture to mesh. For example, the surge in oil yesterday on potential production cuts from Saudi Arabia and Russia is a positive sign, but the dollar is again strengthening, an indication that non-US dollar borrowers are having trouble in spite of the Fed’s swap lines to foreign CBs. Treasury implied vol has come down and the VIX has generally declined since mid-March, but VIX still remains elevated at 52. Libor has shown tentative signs of easing, setting at 1.373 yesterday, having backed off from a high of 1.45 at the end of March, but that’s still 130 bps above the Fed Effective rate which hit a record low 6 bps on Wednesday. There’s a decent amount of press today about banks having balked at implementing the Treasury’s small business lending program because the rate was at only 0.5%, so now the treasury has adjusted the rate higher to 1%, but that’s still well below current libor which is supposedly for the best credits in the market.
–CLK0 settled yesterday at 25.32 and is more than a dollar higher this morning; a few days ago it was hovering around 20. Gold also had a nice pop with GCM0 up to 1637, though it’s now 1630 with old highs at 1700 remaining the key resistance area.
–Rate futures were fairly quiet yesterday. The euro$ curve steepened. Reds-0.25, greens -2.0, blues -3.375 and golds -3.625. The ten year yield eased slightly to 62.4%. Implied vol in ten-year futures has been declining, now near recent lows at 5.7 to 5.8. The week-2 139 TY straddle which settles this coming Thursday traded 1’06 mid-session and settled 1’05. Previously, the atm straddle with a month to go was around 1 point. Currently 1 point in TY is worth approx 11.5 bps. This morning EDJ0 trades 9886.5, a rate of 1.135%. More than 20 bps of convergence left, which indicates the libor setting will decline further.
–Today, the employment report is released, my guess is for NFP to be -200k. Pretty difficult to attribute much importance to this number which will surely deteriorate appreciably given jobless claims of 10 million in the past two weeks.
–Money supply yesterday shows the annual growth at 9.4% for M2. Previous peaks in annual growth were 12.5% in 1983, 10.5 in 2001 and 2009, 10.2% in 2012. In each instance besides 2012, inflation rose with a lag. M2 growth is certainly going to smash all previous highs. The question is whether inflation will follow. The long end of the curve doesn’t indicate that outcome so far; the ten year tip breakeven is only 101 bps.
