Sell Mortimer, SELL
September 22, 2023
–If there was ever a repudiation of MMT (Modern Monetary Theory) it’s going on right now. No Stephanie, the gov’t cannot spend whatever it wants without consequences. The curve bear steepened yesterday with the ten year yield up 13.3 bps to 4.478% while the two year rose 3 bps to 5.146%. 2/10 (attached) made a new recent high of -66.8. Stocks tumbled with SPX -1.6% and Nasdaq -1.8%. SOFR curve also steepened with reds -8.625, greens -11.75, blues -14.75, golds -16.125. The green, blue and gold packs (3rd, 4th, 5th years forward) are all right around 4% at 9602, 9606, and 9597. The higher for longer theme is weighing on everything. However, the BOJ is still holding ultra-easy policy and tacitly letting the yen slide. $/yen now at the year’s high 148.20 having started 2022 around 131.
–One large SOFR option trade of interest: buyer of over 40k SFRF4 9475/9525/9575 c fly for 3.5 to 3.75 (settled 3.75 against underlying SFRH4 9459.5). Expiration is Jan 12. I guess this guy’s idea of a Happy New Year is when the wheels fall off the economy and the Fed is forced into cuts. Taking the opposite side was a buyer of about 60k FFX3/FFF4 spreads for 6.0 (9460/9454). FOMC meetings are Nov 1, Dec 13 and Jan 31. Somewhat strange OI changes: according to prelims Nov had volume 231k and Jan 138k. OI was up 59k in Nov and just 7748 in Jan. In any case, if the Fed were to hike in Nov and skip in Dec, (or if perceptions solidify around that scenario) then the spread would move towards zero. So this spread really isolates odds for a December rate hike: a skip in Nov and a hike in Dec, or hike/hike. Pay 6 seems a bit high to me. The Jan/Feb spread, FFF4/FFG4, settled 0.5, 9454 and 9453.5. That spread isolates the Jan 31 meeting; a price near zero indicates that nothing will happen. A more passive/aggressive trader than the Jan call fly buyer would sell F4/G4 into inversion, looking for the Jan ease. SFRZ3/H4 settled -7.5 (9452.0/9459.5).
–S&P Composite PMI was 50.2 last, expected this morning at 50.1.
2/10 below
