Destroy demand by Christmas
May 17, 2022
–Low volume Monday. The ten year yield eased 5.8 bps to 2.873%. New lows in several of the near one-year eurodollar calendars. I’ll focus on Dec’22/Dec’23 which printed -0.5 and settled 0.0, down 6 on the day from Friday; it’s the nearest one-yr to have slightly inverted. In early January, this spread was as high as 68.5. The trend lower gives some indication of how the Fed’s rhetoric to front-load hikes and destroy consumer demand has caused a continuing reassessment of the need to tighten in 2023. For a comparison with other contracts, SFRZ2/SFRZ3 settled 8.5 (high of this year 67.0) and FFF3/FFF4 settled 17.5 (high of year 65).
–July WTI crude settled 111.82, a new high settle for that contract, and July Wheat settled limit bid at 1247 1/2, up 70 cents. Fed’s going to have to destroy a lot of demand to keep up with the supply destruction.
–Implied vol was lower across the board in rates. Powell interviewed today by WSJ’s Nick Timiraos starting 2:00 EST. This follows Bernanke’s assessment that it was a mistake for Powell to wait so long to start hiking. (Thanks Ben). Retail Sales today. Dollar is easing this morning and stocks have a nice bounce to start the day. There continues to be a block buyer of FVM2 at the futures settlement time of 2pm CST, yesterday a buy of just over 6k. Open interest has fallen in FVM by a like amount on each purchase, although yesterday total FV OI was around unchanged, as a decline of 14k in FV2 was nearly offset by a rise in FVU. I would again mention that in Nov 2018 the five-yr topped at 3.09%. On May 6, two Fridays ago it hit 3.08%, and since then the yield has generally declined, to 2.814% yesterday (FVM2 settle 113-090).
