FOMC day
July 27, 2022
–Attached is a chart of SFRZ2/SFRZ3 one-year calendar. At 9:45 EST there was a 67k block buy at -63.0 (when the spread was offered at -65.5). By the end of the day the spread was trading -54, for a gain of ~$15m ($1.675m DV01). At the 3:00pm EST futures settle, the SOFR spread was -55.5 but EDZ2/Z3 settled -68.5, with the difference between SOFR and ED attributable to the libor related turn-of-year credit aspect on the ED contract. Open interest was up 43k in SFRZ2 and 58k in Z3 so position is new. Peak OI on both ED and SOFR curves is in Z2 with 1.6 million and 990k.
–This one trade defined much of the day’s price action. For example, on the ED curve red pack (2nd yr) settled -3.125 while the white pack (front four contracts) settled +0.875 and the greens +2.875. I.e. the sell leg of the spread was distributed across reds and spilled into the 2yr treasury. Therefore, the red/green pack spread settled at a new low for the month of July at -34, though not quite at the June low of -40. Similarly, the 2/10 treasury spread settled at a new low of -26…that’s through the 2006 low of -19 though not quite at the 2000 low of -56. The 2y yield rose 1 bp to 3.04 while tens fell nearly 3 to 2.787.
–Yesterday’s Consumer Confidence number was unsurprisingly weak at 95.7 vs 98.4 last. Lowest since covid and back to 2016 levels when we feared the election of Hillary. New Home Sales weak as well at a 590k rate (expected 655k). Today is, of course, the FOMC meeting, with a 75 bp hike baked in the cake. If the Fed hikes 75 then FFQ2 should settle 9767.0. FFV2 settled 9705.5, so 61.5 above what SHOULD be the new Fed Effective, essentially indicating 50/50 odds of another 75 at the Sept 21 FOMC. However Z2/Z3 trade leans toward the idea of this being the last hike.
–MSFT and GOOGL lifted ESU2 after the close, but SHOP’s notice of a 10% job reduction is likely more important as it’s another in a line of high profile job cut announcements. Both Powell and Yellen have pointed to solid labor dynamics as evidence the economy is good, but the trend has changed. Meta reports today. Xi and Biden to speak on Thursday: “What are we going to do about Nancy?”
