Stress
March 4, 2022
–This morning May Wheat trades 12.09 as the odds of a nuclear accident rose substantially with a fire at the Zaporizhzhia nuclear generation plant in Ukraine. Reportedly now under control, but that name looks suspiciously like “vaporize”. Has wheat ever traded at a premium to beans? May beans currently 16.57.
–I was once at a bar in London entertaining a group of traders, I believe it was at the Artful Dodger, and I pulled out a stack of pounds to pay for the first round, and one of the guys discreetly pulled back my arm and muttered, “Get your card out mate, this is going to be expensive.” And of course, it was. It turned into many rounds. We’re now in a world where it’s going to be expensive and not as fun.
–Heavy pressure on EDH2 yesterday which settled 9928.0, down 7.5 despite FFJ2 (which prices the odds of a March hike) only down 0.5. This morning EDH2 printed 9922.5 and is currently 9925.5, down 2.5 on the day despite all deferred contracts trading higher. EDH2 to SFRH2 (sofr) is printing 29, up 10 bps in two sessions. That front ED/SOFR spread is now the highest on the curve. That’s the beauty of libor based contracts with the embedded credit component reflecting stress (and that’s exactly what it’s doing now). It’s like the old TED spread, 3m t-bills vs 3m eurodollar, somewhat equivalent to the VIX of today…a fear indicator. Of course, in today’s enlightened world of central banking, where money is conjured up like confetti, monetary stress isn’t as much of an issue… until you pull up to the gas station or grocery store.
–Yesterday the red/gold pack spread settled at a new low of NEGATIVE 16.625. The red pack, 2nd year forward, closed 9786.375 (~2.13%) and golds, the fifth year forward, closed 9803 or 1.97%. This spread is unambiguously forecasting recession ahead. It looks like it printed slightly lower in 1995, but that’s when blue and gold euro$’s were first introduced. In 2000 the low was -7.875. In 2006 the low was +10.25. In December 2018, the low was -5.625. This is a HISTORIC low, and it may not be screaming recession, but it’s certainly muttering. The low in 2006 preceded Bear Stearns’ mortgage fund collapse by a full year. I.e. there’s likely a bit of time to prepare. By the way, the red/green (2nd/3rd years) pack spread is also inverted, settling negative 13.625. This is NOT good.
–Employment report today with NFP expected 420k. As Powell emphasizes, the labor market is awfully strong. But it’s a lagging indicator. On the other hand, the US Army will likely step up hiring. Like Dewey Oxburger said, “I’m gonna walk outta here a lean, mean, fightin’ machine.”
