Employment day
August 5, 2022
–Yields slipped in front of today’s Employment report. The ten year fell 7.7 bps to 2.668%. On the eurodollar curve, greens (3rd year out) have been the most volatile, and rallied 13 bps today. NFP is expected 250k, though stronger numbers would fit the administration’s and Fed’s narrative a bit better. Wages yoy expected 4.9% from 5.1.
–Large exit of the SFRZ2/SFRZ3 spread on a block: 57k were sold at -54.0, an exit from the July 26 buy of 67k at -63. SFRZ2/SFRZ3 settled -55.5. By comparison, EDZ2/EDZ3 settled -69.0. The libor transition occurs at the end of June 2023, so SPRZ3/EDZ3 is pegged at 26. The relative weakness of EDZ2 is attributable to turn-of-year pressure which seems to be worth about 9 bps and credit concerns, about 4-5 bps.
–Implied vol is fading in the short end as the market has determined that Fed chatter of 75 at the September meeting is likely empty talk, and if it DID occur it would probably shave future hikes. Job cut announcements are becoming more prevalent, and though gasoline has come down, a higher cost of living has become accepted if not acceptable. New low in red/green euro$ pack spread at -42.625. As previously mentioned, this spread is at a new historical low at least since 1998…low in 2000 was -9.375, barely inverted in 2006 and 2007, and low in 2019 was -9.625. Perhaps Mary Daly can keep an eye on that with respect to how the market perceives forward Fed policy, because this spread is blithely ignoring her protestations that the Fed won’t ease in 2024. Below is a chart from a couple of days ago.
