Cutting (talking rates here, not Joe)
July 12, 2024
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–CPI hadn’t had a negative monthly print since covid, and yesterday the headline was -0.1% (yoy 3.0) with Core +0.1% (yoy 3.3). Rate futures surged. Curve steepened with the 2-yr down 12.5 bps to 4.505% and ten-yr down 9 bps to 4.191. 2/10 did not quite end at a new high (-31.4) but 5/30 did (+28.0). October Fed Funds (FFV4) settled up 5.5 bps at 9492 or 5.08%, exactly pricing a 25 bp cut from the current EFFR of 5.33%. SFRU4/SFRZ4 settled -37.5 (9493.5/9531) a new recent low. Given that an ease at the Sept 18 FOMC is being fully priced, another 1 to 2 priced for SFRZ4 is somewhat aggressive. However, it’s not out of the question to imagine a 50 bp cut if the data go pear-shaped. The political situation in the US is still… shall we say… fluid. Could that lead to a decline in business confidence?
–SFRU4/SFRU5 settled -124.5. down 10.5 on the day! Almost exactly 5 eases. That’s not, of course, a projection of an exact rate cut schedule, it’s just a range of various odds. But the spread is still equal to 5 cuts! And the KRE (regional bank ETF) was looking for just that sort of liquidity lifeline to get out from under the black cloud of commercial real estate. KRE surged +4.2% to the highest level since January, while SPX was -0.9%. Amazing rotation from Nasdaq to Russell with Nas Comp -1.95% and R2K +3.6%. Big bank earnings today including JPM, C, WFC.
–Note that treasury vol ended at new recent lows. I marked TYU4 111^ at 1’44 or 5.5% (from 5.7). The Sept atm 110.5^ on Monday was 1’56 or 6%. The drop in yields is not related to any type of ‘flight to quality’ panic, rather it’s just relief that funding rates will be coming down. However, there is still a sense that forward rates are limited in terms of how low they can go. Not an environment that sparks a mad grab for premium. The peak contract on the SOFR curve has moved forward a couple of slots and is now SFRH7 at 9653, or around 3.5%. The 5y yield ended at 4.123%. A new catalyst could be lurking around the corner, but lower funding rates can paper over a lot of chronic problems, at least in the short term.
–PPI today expected 2.3% yoy with Core 2.5 from 2.3.
–Heavy trade yesterday, but one noticeable (pre-data) exit was the sale of >50k SFRZ4 9475p at 2.0. On Wednesday there was a buyer of >50k SFRZ4 9525/9550cs for 6.5, and the contract magically vaulted above the lower strike yesterday, settling 9531 (+10.5) with open interest up 32k. The call spread settled 8.75. Nice one.
