April 5. Stocks respond to tweets, the Fed doesn’t
–Monster rally in stocks completely erased Monday’s losses. While SPX had broken the 200 DMA, it closed well above yesterday. Nasdaq and Russell have thus far held 200 day averages. Rates edged higher, with tens +1/2 bp to 278.8. EDM8/EDM9 spread, which remains the peak one-yr calendar, settled 38, but was 39/39.5 late. There continues to be buying in front call spreads vs midcurve calls. Yesterday +30k EDN8 9787/9812cs vs -30k 0EN 9787c flat. (Settled flat, 1.5/0.25 vs 1.25). July options have Sept futures as underlying. EDU8/EDU9 spread is 35 bps. With EDU8 9760 (calls are 17.5 bps out of the money), the favored scenario would be a compression of libor/ois along with clear signals by the Fed that the tightening campaign is drawing to a close. If Bullard were the Fed chief then these trades would be great! Yesterday, Bullard said rates are already close to neutral and that he hasn’t seen much in the way of wage inflation. However, he also said curve inversion later this year remains a possibility.
–Economic data this week suggests tightening still on course, and that is likely the message that Powell will reinforce on Friday. Again, Brainard in Wednesday’s speech said that asset prices are still elevated. The Fed’s new motto is “The stock market is not the economy.”
