Gearing up for a July FOMC cut
June 7, 2024
**************
–ECB delivered a 25 bp cut, as expected, but Lagarde tried to temper enthusiasm for further easing. EUR ended a bit higher and is unch’d this morning. US yields closed slightly lower with tens down 1 bp at 4.277%; futures are going into today’s employment report at the top end of the range since April. NFP expected 180k from 175k and the rate is expected unchanged at 3.9%. The market appears to perceive risk is weighted to a weak number – heavy buying of week-2 FV calls. FV wk2 107c 19 paid for 30k and 107.25c 14.5 paid for 15k. Settled 21 and 15.5 vs FVU4 106-2575. Open interest in FV week-2 calls alone was +69k. Week-2 options expire 14-June, so next week’s CPI and FOMC are covered. There has already been a significant rally in all rate futures this week, but the fear is that there’s more to come. Ten year yield down nearly one-quarter pct since Friday. Same thing on the SOFR strip: SFRM5 +24.5 to 9569.5, SFRM6 +25 to 9622 and SFRM6 +26 to 9635.5 just since Friday, 31-May.
–Also out today is lagging data…Q1 Fed Z.1 report at noon, which highlights Household Net Worth. It will be reported as significantly higher due to the rally in stocks from Jan to March. Also, Consumer Credit, expected +10-11 billion. More obvious cracks are opening regarding Consumer finance, but this data is for April.
–New lows in the first two SOFR one-year calendars with M4/M5 -101.75, down 1.5 on the day (9467.75/9569.5) and U4/U5 -99, down 1.5 on the day (9489.5/9588.5). There was a monster buyer of 180k SFRM4 at 9466.75. New, as open interest jumped 140k. Appears to be a great risk/reward trade as a cut in July would add about 12 bps to the contract. As of now, FFQ4 settled 9472.5 or 5.275 vs Fed Effective 5.33, so around 22% odds of an ease at the July 31 FOMC.
