Awesome
February 6, 2022 – Weekly Comment
The transition away from the global benchmark for short term rates, upon which millions of contracts are based, is in full swing. The Libor rate, which contains a credit component, was subject to manipulation by bank traders. After much sanctimonious outrage, the regulators determined that SOFR, the secured overnight funding rate, would be the appropriate replacement.
Last week a federal appeals court reversed the convictions of two Deutsche Bank traders who had previously been found guilty of rigging libor settings. (Maybe shenanigans aren’t quite as easy to prove as it appeared). At the same time, SOFR options are now beginning to trade on the CME. These options are mostly trading on Blocks which means more of a call-around market rather than liquidity being transparently provided in the pit or on screens. In my opinion, it ends up costing end users in time, liquidity and competitive pricing. There. Fixed it. Awesome.
Big rate moves across the globe last week. In treasuries, yields were up 15 to 17 bps, 2s +15.4 to 1.322%, 10s +15.1 to 1.928% and 30s +14.7 to 2.228%. In the front end, the trend of pricing front-loaded hikes was exacerbated by the ECB’s press conference and the US jobs report. FFF3 settled 9856.0 or 1.44% (up 15.5 bps on the week!) as compared to the current Fed Effective Rate of 8 bps. So 136 bps of Fed hiking is being priced, 5 or 6 quarter pct moves (if that’s still the appropriate increment), by year end. In Eurodollars, EDH2/EDH3 one-year calendar spread rose 10.5 bps on the week to a new high of 122. However, the forward one-year calendar, EDH3/EDH4 actually declined by 3.5 on the week to just 30.5, while EDH4/EDH5 rose 1 to 2.5. Central banks have suddenly found inflation religion and want to hike NOW. This dynamic was fiercely expressed in Schatz which rose 36 bps on the week to negative 24.7 bps. But markets are reflecting trepidation on resulting growth prospects a year or two out…
On the Euribor curve, ERH2/ERH3 exploded from 45 to 88.5 Friday to Friday! However, ERH3/ERH4 declined 3 bps from 37.5 to 34.5, and ERH4/ERH5 plunged from 12 to 3. The back end of the Sonia futures curve has been inverted for quite some time, and that’s where this week’s moves were most dramatic. SFIH2/SFIH3 increased from 82.5 to 86.5. But SFIH3/SFIH4 tanked from -1 to -14, and SFIH4/SFIH5 from -16 to -17.5.
The pricing pressures that our central bankers are sniffing out were apparent, well, everywhere really, but this week a glance at energy markets provided evidence. CLH2 surged to a new high of 92.31/bbl, up 5.49 on the week. Of course, the one-year forward CLH3 was up only 3.00 on the week, from 75.68 to 78.68. Remember less than two years ago front WTI contract traded negative 40.00 because there was no place to put it? That was awesome, wasn’t it.
CPI is released Thursday, expected to show a yoy gain of 7.3% vs 7.0 last month. Bbg Commodity sub-index closed at a new high of 65.45 this week. On Feb 5, 2021 it was 50.41, so a rise of just under 30% on the year. There are widespread reports of fertilizer shortages and huge increases in farming input prices. World Agricultural Supply and Demand Estimates (WASDE) on Wednesday.
The employment report provided a selling catalyst on Friday. On Monday WH press Secretary Jen Psaki gave a detailed warning that employment data could be quite weak due to the omicron variant sneakily coinciding with the payroll survey week. ADP corroborated the story with a huge miss of -301k, released on Wednesday. The previous month’s number was also revised lower. But then Friday’s payroll report showed a gain of 467k jobs with the previous month revised up from 199k to 510k. So, a net swing of about 650k from what had been expected this month and reported last month. That’s awesome, isn’t it. Maybe we should have the crack libor investigative team look into THESE small discrepancies.
I’ve previously written about the Landscape of Fear, which postulates that apex predators instill fear into the lower tiers which use more caution when feeding etc. It leads to a healthier and more diverse ecosystem. We’re currently getting an injection of fear into financial markets. Not enough to really change behavior yet, but it’s starting to get close. Maybe markets will be healthier, though less “efficient”, when some inventories are kept on hand, when end supplies are from a more diverse chain. Maybe higher rates will provide a hurdle for capitalism, where the stupidest ideas are weeded out, and zombies fail… perhaps freeing resources for better uses.
OTHER MARKET THOUGHTS/TRADES
According to the latest TBAC financing table, auctions this week consist of $50 billion in threes on Tuesday, $37 billion in tens on Wednesday and $23 billion in thirties on Thursday. Of this $110 billion, about half is new funding. Easier or harder to digest at higher yields? More importantly, as the surge in short rates removes forward positive carry, where does the buying come from? WI ten year yield was 1.927% late Friday. EDM’23 settled 9802.0 or 1.98%. So in sixteen months carry is gone? Awesome.
The Fed’s semi-annual testimony to Congress is usually at the end of February, though I still don’t see it on the calendar.
| 1/28/2022 | 2/4/2022 | chg | ||
| UST 2Y | 116.8 | 132.2 | 15.4 | |
| UST 5Y | 161.9 | 178.6 | 16.7 | |
| UST 10Y | 177.7 | 192.8 | 15.1 | |
| UST 30Y | 208.1 | 222.8 | 14.7 | |
| GERM 2Y | -60.7 | -24.7 | 36.0 | |
| GERM 10Y | -4.5 | 20.5 | 25.0 | |
| JPN 30Y | 75.4 | 80.2 | 4.8 | |
| CHINA 10Y | 271.1 | 271.1 | 0.0 | |
| EURO$ H2/H3 | 111.5 | 122.0 | 10.5 | |
| EURO$ H3/H4 | 34.0 | 30.5 | -3.5 | |
| EURO$ H4/H5 | 1.5 | 2.5 | 1.0 | |
| EUR | 111.49 | 114.49 | 3.00 | |
| CRUDE (active) | 86.82 | 92.31 | 5.49 | |
| SPX | 4431.85 | 4500.53 | 68.68 | 1.5% |
| VIX | 27.66 | 23.22 | -4.44 | |
from comments by a guy named Paul Morley:
I caught Popper about ten feet away going on stage and said “you’re fucking awesome!” he heard me through the rest of the crowd, took a step towards me and said “no no no man, YOU’RE fucking awesome!” That’s how fucking awesome he is.
“Someday an answer will find us, quite a long shot
But anyway, I think the past the past is behind us
Be real confusing if not but anyway
I put all my hope in tomorrow, it’s gonna be great
I can tell but anyway I see a new, a new day dawning
I like to sleep late, oh, well but anyway”
