Econ commodities and rate spreads send a worrisome signal
October 5, 2023
–Last Thursday Nov Crude touched $95/bbl. This morning it’s 83.50 after a 5 dollar plunge yesterday to 84.22. Along the same lines, Dec Copper is at a new low for the year, printing 3.5555 after having been over 4.25 in January. BofA has reported decelerating credit card spending for several weeks (Consumer Credit released late tomorrow). Equities had a small bounce yesterday and the curve bull steepened with the red pack +10.5 on the day. The 2y note plunged 10.2 bps in yield to 5.048%, whiles tens fell 7 to 4.735%. The spread between the two made a new high for the year at -31.3 [chart attached]. Also attached is a chart of the spread between SFRH25 and SFRH28; both contracts settled at the exact same price of 9566 or 4.34%. Every contract in between is at a higher price, with the peak SFRZ25 at 9591. What does it signify? First the lower rates in near contracts show a steadfast belief that the Fed’s going to be cutting, it’s just a question of how fast and how hard. The steepening from Z25 back is a more normal situation; as the Fed cuts the back end of the curve will steepen further. More than that, this spread, on a rolling 7th to 19th quarterly contract rolling basis is back where it was in the aftermath of the regional banking crisis in March. Of course, the spread could be wrong, but when coupled with evidence of declining prices in economically sensitive commodities, it points to a not so good landing.
–In terms of fast and hard, there was a new buyer yesterday of 50k SFRZ3 9475/9500cs which settled 1.5 vs SFRZ3 9456.0. Might just be protection, as this trade requires easing for the lower strike to be in the money.
–Jobless Claims today expected 210k. Kaiser Permanente strike announced yesterday is 75k employees. Several Fed speakers on the schedule, including Mester, Barkin, Daly, Barr. “We might need another hike but we expect the job market to remain resilient.” That’s my guess anyway. What might become important is if they talk about the theme of higher long-term rates choking off the need for Fed vigilance on the short end. Which would be a green light for buying the last reds and greens and selling more deferred, even though the spreads have already had strong moves.
