DETOX
March 9, 2025 – Weekly Comment
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They tried to make me go to rehab, but I said “No, no, no”
Yes I’ve been black, but when I come back, you’ll know, know, know
–Amy Winehouse – Rehab
“…the market and the economy have just become hooked; we’ve been addicted to this government spending. And there’s going to be a detox period.”
–Treasury Sec’y Scott Bessent on CNBC Squawk box interview.
The lines just prior to the bit above: “…could we be seeing this economy that we inherited, starting to roll a bit? Sure. There’s going to be a natural adjustment as we move away from public spending to private spending”. Bessent and others have said the process will not be linear.
We’re going into rehab.
Momentous policy shifts across the globe necessarily come with massive capital shifts.
A recap of some of the week’s big news:
While it doesn’t appear as if government lay-offs have yet been captured in payroll data, “U-6* [under-employment rate] up 0.5% to 8%, largest one-month increase (excluding Covid) since 2009 and 2001 recessions; now 1.5% off low.” (Chris Long on LinkedIn). Headline Unemployment rate was up 0.1 to 4.1%. Both Powell and Bowman indicated a subtle shift in the Fed’s focus to the labor side of the dual mandate, rather than inflation.
SPX is down just over 6% from the high, and fell 3.1% this week. NVDA alone has shed nearly $1 trillion in market cap from the high in January. NDX is down 8.9% from the high. Are retailers foreshadowing a ‘reverse wealth effect’? COST -8% this week. TGT -7.3%. BBY -11.7%.
Atlanta Fed’s GDP Now for Q1 currently stands at -2.4%. Go back to Feb 19 and just change the sign, it was +2.3% just over two weeks ago!
The economy is slowing under the haze of uncertainty. Huge move in German bunds this week as Merz promises to do ‘whatever it takes’ to ramp up defense spending. Ten-year yield in Germany exploded by 43 bps to 2.836% even as the ECB (as expected) cut rates to 2.50%. EUR surged from 1.0378 last Friday to 1.0874. As an aside, @GlobalMktObserv shows that German GDP share of the global economy has halved in the past three decades, from 8.4% in 1990’s to an all-time low of 4.3% now. Hand-in-hand with Greta Thunberg and the green energy agenda. This week’s pivot has to be good for uranium/nuclear. Defense mfg requires energy apart from intermittent winds.
From my note last week: Chart above is EUR/JPY. I can’t help but feel that a large downside move is near. Then I wonder if perhaps Europe makes a U-turn… Perhaps huge investments in defense/tech are around the corner. Could Europe’s manufacturing base become rejuvenated? [EURJPY rallied from 156.27 to 160.36]
One other thing worth mention is a BBG podcast with Dawn Fitzpatrick, Soros CIO. The title is: ‘Investors Underestimate Trump’s Tolerance for Stock Selloff’. A couple of interesting notes: She says, “…what you can’t control is consumer confidence and corporate confidence, and I think that is what is falling off a cliff right now.” No mincing words there. She also says, because of US and European bond issuance, “…one of the things we might see, and this isn’t going to happen tomorrow, but I think it could happen in the next 12 to 24 months is a failed auction out of Europe.” Cites UK and France as most vulnerable. Other insightful comments on private equity and credit near the end. Well worth a watch. 17 minutes.
https://www.youtube.com/watch?v=Qv4qPPj5wI4
In the US rates popped from the year’s lows made last week. The curve steepened. 2s nearly unch’d at 4.00%, 5s +6.8 bps to 4.094%, 10s +8.5 to 4.315% and 30s +10.2 to 4.615%.
Rolling SOFR red/gold pack spread (2nd to 5th years) posted a new high for this year at 31.625 bps. High of the past three years was just under 41 bps in the wake of the Sept FOMC cut of 50 bps. This spread reflects renewed easing expectations – If the Fed is going to cut, short rates will fall faster than long rates. I suspect tens will chop around 4.20 to 4.40 for the next week or so. Ended Friday 4.315%.
This week on Thursday (13th) the Fed releases Z.1 flow of funds report for Q4. The financial press focuses on Household Net Worth. SPX on 9/30/24 was 5762. On Dec 31 it was 5882, up 2%. Interestingly we’re right back to end-of-Q3 level with Friday’s close 5770. Real Estate is always marked higher, though properties for sale in markets like Las Vegas and Nashville are exploding. From Melody Wright: “These 7 [metros] had negative [price] YOY sales per Redfin and an increase in inventory of greater than 20% YOY: Las Vegas, Tucson, Sacramento, Nashville, Austin, Dallas, Los Angeles”
On the week SFRM5 +1 at 9596.5. M6 -0.5 at 9643.0, M7 -8.0 at 9633.5, M8 -12 at 9621.0. Back end responding to German spillover, supply (US auctions 3s, 10s, 30s this week). Remember the guy that kept buying SFRZ5 9700c vs 0QZ5 9750cs for 2 to 3? Settles 15.0 vs 9632.5 and 11.5 vs 9640.5. But…it’s likely the same trader that had rolled his Z5 9700c to U5 9650c. Those settled 14.75. I think he mostly took in 0.5 on the U5/Z5 switch. U5 9650c have 250k open. 0QZ 9750c have 93k open. Largest trade Friday was a sale of over 50k SFRU5 9625c at 24.0 covered 9525.5 to 9526.0, 50d. Settled 21.25 vs 9619.5. Exit trade, OI down 43k in calls and 15k in futures.
CPI on Wednesday expected 2.9% yoy vs 3.0 last. Core expected 3.2% from 3.3%. Remember, the Fed is shifting focus from inflation to labor. Tuesday’s JOLTS might be just as important as CPI (expected 7665k from 7600k). Low last year 7372k. I wouldn’t be surprised if it is lower than that.
OTHER THOUGHTS, TRADES
My bias is to buy red sofr contracts on pullbacks. That opportunity could come this week. SFRM6 (9643) and U6 (9642.5) have been peak contracts on the SOFR strip and had powerful rallies since mid-February. For example U6 went from 9603 on 2/18 to 9649.5 on March 4. Could easily see a pullback towards 9620 to 25.
Looking at broken flies in Short July midcurves. March FOMC is almost certain to be a hold. Next meetings are May 7, June 18, July 30 and Sept 17. July midcurves expire July 11, SFRU6 underlying. July FF, FFN5, is close to being a ‘clean’ month. 31 days in July, FOMC is 30-July. The contract settled 9594.5 or 4.055%, reflecting one 25 bp ease. Current EFFR is 4.33% (and FFH5 settled exactly at 9567.0). One cut is 4.08% or 9592.0.
0QN6 9662.5/9687.5/9700c fly settled 4.5. 0QN 9687.5/9718.75/9737.5c fly settled 2.75. The reason I favor broken flies is that an unexpected event could shift rates sharply lower; broken flies at expiry would still show a profit. I would like to buy a bit cheaper than settles.
| 2/28/2025 | 3/7/2025 | chg | ||
| UST 2Y | 399.5 | 400.0 | 0.5 | |
| UST 5Y | 402.6 | 409.4 | 6.8 | |
| UST 10Y | 422.9 | 431.5 | 8.6 | wi 432.2 |
| UST 30Y | 451.3 | 461.5 | 10.2 | wi 461.7 |
| GERM 2Y | 202.5 | 224.7 | 22.2 | |
| GERM 10Y | 240.6 | 283.6 | 43.0 | |
| JPN 20Y | 202.7 | 223.1 | 20.4 | |
| CHINA 10Y | 177.8 | 184.5 | 6.7 | |
| SOFR M5/M6 | -48.0 | -46.5 | 1.5 | |
| SOFR M6/M7 | 2.0 | 9.5 | 7.5 | |
| SOFR M7/M8 | 8.5 | 12.5 | 4.0 | |
| EUR | 103.78 | 108.34 | 4.56 | |
| CRUDE (CLJ5) | 69.76 | 67.04 | -2.72 | |
| SPX | 5954.50 | 5770.20 | -184.30 | -3.1% |
| VIX | 19.63 | 23.37 | 3.74 | |
| MOVE | 104.46 | 104.41 | -0.05 | |
U-6 is Total Unemployed, Plus All Persons Marginally Attached to the Labor Force, Plus Total Employed Part Time for Economic Reasons, as a Percent of the Civilian Labor Force Plus All Persons Marginally Attached to the Labor Force (U-6)
