And then, depression set in
July 7, 2022
–Flattener yesterday as Fed minutes warned of the risks of entrenched inflation. Red eurodollar pack was the loss leader in rates, closing down 19.5 bps; EDH4 and M4 were both -20 on the day. The two year yield jumped 14 bps to 2.955%, while tens rose 10 bps to 2.908%, enough of a move to cause a new low in 2/10 spread at -4.7. EDU2/EDU3 rose 13 bps to -2.5 (9676, -5.5, and 9678.5, -18.5). Huge technical failure in TYU, which came within a few 32’s of the May 26 high at 120-19+ early in the session, but then reversed hard to settle 119-01+.
–EDZ2 remains the lowest contract on the strip at 9631.5 or 3.685%; the Z2/H3 spread settled -10. Weakness in EDZ2 appears to be related to the ‘turn’ as the SOFR strip has the Dec contract at 9668.5 and March 9667.5 (SFRH3 is the lowest on the SFR strip). So, Dec/Mar ED is -10 and Dec/Mar SOFR is +1. FFF3 settled 9666.5 so everything points to an end of year culmination to the Fed’s hiking campaign, at a target of 3.25 to 3.5. FFQ2 settled 9771.5 or 228,5 bps, very close to pricing 75 at the FOMC on July 27, which would put the EFFR at 233. There will be three more FOMCs after the July meeting in 2022: Sept 21, Nov 2 and Dec 14.
–EDZ2 is emitting a whiff of credit concerns (and that’s why we liked libor based futures); the plunge in commodities will likely cause some stress as well. Speaking of stress, there was an interesting tweet about auto repos yesterday (link below, salient part around 4:30). According to this report, pre-pandemic 2018 to 2019 repos were about 1.8 million each year. Halfway through this year we’re ALREADY at 2.2 million. I was not able to double check this data, but if autos were a big part of the inflation wave, the implication is that we’re in for a hard reverse. “And then, depression set in.”
–Data today includes Challenger job cuts, Jobless Claims expected 230k, Trade balance. DXY (dollar index hit a new high yesterday at 107.26).
