Hikes give way to cuts. That’s just how it is.
January 5, 2023
–Early exit sale of 50k TYG 113.5/114.5 call spread at 26. Open interest down 37k in both strikes; settled 23 ref TYH3 113-06. Implied vol down fairly hard in short end with straddles down 2 to 3.5 bps. Fed minutes…higher for longer? Honey badger don’t give a sh-t. SFRM3/SFRZ3, the six-month calendar for the end of the year, settled unchanged, but it’s still inverted by 45 bps (9503/9548). The most inverted one-year calendar remains U3/U4 at -139.5. That spread actually declined by 7.5 yesterday, with SFRU3 -1.5 to 9518.5 and U4 +6 to 9658.0. Recent low has been -155. The market respects the Fed’s resolve…for the next few months. For example FFN3 (July Fed Funds) settled -1 at 9502.5 or 497.5 bps, which is 5/8% higher than current EFFR of 433. OK Fed, we KNOW you want to hike more in Q1. But after that, over 100 bps of ease is priced by July’24, with FFN4 9613.5 or 386.5.
–ISM Mfg yesterday price component was just 39.4, consistent with bad times. I have helpfully overlaid M2 yoy growth on the chart below.
–Today brings employment data teasers, with ADP expected 150k and Jobless claims 225k. Pre-empted by AMZN announcement of 18k job cuts and Salesforce cutting 10% of staff. NFP tomorrow expected 200k, with ISM Non-mfg PMI expected 55 from 53, a stark contrast to yesterday’s fall in Mfg PMI to 48.4.
