Stop Making Sense
July 2, 2021
–NFP expected 716k with yoy Avg Hourly Wage +3.6% from +2.0 last. It doesn’t seem to matter to fixed income, as stocks power to new highs and oil trades above $75/bbl, the high since 2018. This period (mid 2018) was when data was strong following Trump’s tax cut package, and the Fed was tightening – what they used to refer to as “taking away the punchbowl”. Different from today, when they’re pouring in grain alcohol and making sure there’s plenty of weed for the non-drinkers. As of this morning, USU trades 160-29, the bearish price action from Wednesday afternoon into yesterday morning has been erased with prices testing Wednesday’s high of 160-31. Though today’s data could change things, my bearish outlook didn’t pan out and I would have to cut the short position.
–Oddly, the eurodollar curve is telling a slightly different story. The peak one-year calendar is EDU’22/EDU’23, which settled at a new high of 65.5. The market appears to expect Fed hikes that will snuff out any embers of lingering inflationary expectations. Current inflation is obvious, but I suppose it’s a story of skating to where the puck is going to be, not where it is now. I just think they’re skating in the wrong direction. Given the SOFR transition at the end of June 2023, the Sept 22/23 spread is probably indicating two rate hikes. A cleaner reflection of Fed hike expectation is Jan’22/Jan’23 FF spread, which settled 27.5, so at least one Fed move is priced for that period.
–Deep in-the-money call buying in eurodollars: 18k EDZ2 9900c for 56.5, settled 55.75 vs 9946, 5k EDH3 9775c for 164, settled 163.25 vs 9934, and 5k EDM3 9775c for 153, settled 151.75 vs 9919. From open interest prelim, appears to be new buying of 75 to 90 delta calls. Just one more trade that doesn’t seem to make much sense….but I am getting used to that by now.
–Beware of thin conditions this afternoon as the holiday weekend starts. Happy 4th!!
