Gimme Three Steps
December 3, 2023 – Weekly Comment
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I was cuttin’ a rug
Down at place called The Jug
With a girl named Linda Lou
When in walked a man
With a gun in his hand
And he was looking for you know who…
As everyone knows, there was an explosive bond rally in the past week. All I could think of is the shorts making this request to the margin clerks (like Ronnie Van Zant in the Lynyrd Skynyrd song):
Gimme three steps, gimme three steps, mister
Gimme three steps towards the door?
Gimme three steps, gimme three steps, mister
And you’ll never see me no more
Star performer on the week in rate futures was SFRZ4 which sprinted nearly half a percentage point to settle Friday at 9601.0 or 3.99%. Even though SFRU4 saw some of the largest outright futures and options trades and closed +47 on the week, I’ll summarize by the day using SFRZ4:
Monday: New Home Sales and Dallas Fed Mfg weak. Poor 2-yr auction was immediately followed by a solid 5-yr. Buyer of 50k SFRU4 9700/9800cs for 5.75 to 6.0
SFRZ4 +6.5 to 9558.0
Tuesday: Fed Gov Waller suggests “…the Fed could lower the policy rate just because inflation is low.”
White-lung respiratory issues are spreading through China and parts of Europe.
SFRZ4 +15.5 to 9573.5
Wednesday: Bill Ackman says the Fed may cut in Q1. Huge block buys in SFRU4, 70k.
SFRZ4 +14.5 to 9588.0
Thursday: PCE prices moving in the right direction. Core PCE yoy 3.5% but WSJ’s Timiraos notes the six-month annualized rate is 2.5%, near the Fed’s 2% target.
SFRZ4 -8.5 to 9579.5
Friday: Powell does NOT protest easier financial conditions, and echoes Timiraos on the six-month Core rate of 2.5%.
SFRZ4 +21.5 to 9601.0
Instead of a hard push-back against rapidly easing financial conditions, Powell chose a balanced message, which the market interpreted as “Fed’s done, when’s the first ease?”
BOOM! Net gain 49.5 in SFRZ4 on the week from a rate of 4.5% to 4%.
Now, I know that some of you might not feel like an old song from the Southern Rock era appropriately captures this week’s market dynamics. I just got it stuck in my head and couldn’t get it out. In a nod to today’s environment of diversity and inclusivity, I’m glad to provide an alternative from The Allman Brothers:
Well, I’ve got to run to keep from hidin’
And I’m bound to keep on ridin’
And I’ve got one more silver dollar
But I’m not gonna let ’em catch me, no
Not gonna let ’em catch the midnight rider
Maybe this one IS better, as Dec Silver ran over 14% from the Nov 10 low of 22.28 to Friday’s settle 25.499. Gold was up 7% from the Nov 10 low. Charlie Daniels:
And if you win, you get this shiny fiddle made of gold
But if you lose, the devil gets your soul
Ok. Enough with the southern rock lyrics, right?
It’s worth noting that on Friday, November 24, the midcurve Dec straddle on SFRZ4 settled 25.5 vs 9551.5 (0QZ3 9550^, expires 15-Dec). Not too often that the straddles are so horribly wrong.
In terms of financial conditions, on the week the two-year yield fell by about 36 bps to 4.567% (marked at Friday’s future settlement). Thirties were down 19 to 4.419%. The ten-year yield was down 25.4 to 4.226 at futures settle (TYH4 110-215s), but was 4.196 late (110-28). The 50% retrace from the year’s low in April of 3.308% (after the regional bank turmoil), to the year’s high in October of 4.991% is 4.15%. 4.07 to 4.15 should serve as huge yield support/ price resistance. The BBB/Baa spread to the ten-year plunged from 169 bps at the start of October to 143 bps at month’s end. The dollar index fell over 3% in the month of November from 106.66 to 103.27. And, of course, equities surged with SPX +8.9%. Looser financial conditions could easily contribute to another round of price pressures. We’re now in the blackout period before the December 13 FOMC, so we’ll just have to wait on Powell’s press conference for a change in tone.
Near-term ease odds are represented by Fed Fund futures. After the Dec 13 FOMC there are meetings on Jan 31 and March 20. On Friday Nov 24, FFF4/FFG4 was +2.0 (9465.5/9463.5). In a week the spread flipped negative to -3.5 (9467.0/9470.5). So, FFF4 is right on top of EFFR (5.33%) and FFG4 indicates small odds of an ease. FFJ4 which encompasses both Jan and March FOMCs went from 9469.5 to 9485.0 last week. I had suggested selling Jan/April a while ago at -2 to -3. That spread settled -18.0. By the way, three steps, or a cumulative 75 bps of easing, is first reflected in the FF strip by the August’24 contract which settled 95.445 or 4.555%, which is 77.5 bps lower than current EFFR 5.33%. NOW, I’m done with the song references.
Of course, the respiratory ailment spreading from China is following the covid script fairly closely. The NY Post reports “Massachusetts is 2nd state with child pneumonia outbreak – as questions remain about virus sweeping China”, while CBS News says “Ohio ‘white lung’ pneumonia cases not linked to China outbreak or novel pathogen, experts say”. Trust the science, right?
This week features ISM Services and JOLTs on Tuesday. ADP and Unit Labor Costs Wednesday. Payrolls on Friday. NFP expected 180k while the Unemployment rate could easily tick into the 4% handle (from 3.9% last).
On Wednesday, the Fed releases the quarterly Z.1 report, with data on aggregate debt levels and Household Net Worth, for Q3. In the quarter, SPX was actually down about 3.7%. Real estate will be marked higher for the quarter. However, Melody Wright notes that 42 of the 75 metropolitan areas she tracks are down month/month even as aggregate Redfin data are higher. The Household Net Worth number isn’t closely watched by the market. However, Q2 2023 at $154.281T finally exceeded the previous peak of $152.49T which was in Q1 2022. Q3 could dip back below the Q2 22 level.
OTHER THOUGHTS
Above is 5/30 treasury spread. Typically bottoms before actual ease starts. Current level is +26 bps (4.13%/4.39%). The low in 2018 was around 20 bps, and the spike low before the Covid surge in 2020 was around 50 bps. Several analysts have noted that long bond yields could actually go UP on a new Fed ease cycle. The 50% retrace in the 30 yr yield from the year’s April low to October high is 4.33% (4.39% late Friday). Around that level I would buy 5/30 with an initial objective of 50; my stop-out level would be 10-12. I would also look at buying US put spreads if the 30y yield gets near 4.33%. Can also consider long midcurve gold SFR put spreads to express the same idea.
SFRM4/M5 one-year calendar settled -117.0. Look to sell with target -140, buy-stop close above -110. Dec/Dec settled -137 and March’4/March’5 at -137.5.
Be a simple kind of man… and go with the negative curve roll.
| 11/24/2023 | 12/1/2023 | chg | ||
| UST 2Y | 492.0 | 456.7 | -35.3 | |
| UST 5Y | 448.0 | 415.6 | -32.4 | |
| UST 10Y | 448.0 | 422.6 | -25.4 | |
| UST 30Y | 461.0 | 441.9 | -19.1 | |
| GERM 2Y | 307.1 | 268.2 | -38.9 | |
| GERM 10Y | 264.7 | 236.2 | -28.5 | |
| JPN 20Y | 149.1 | 143.7 | -5.4 | |
| CHINA 10Y | 270.6 | 268.3 | -2.3 | |
| SOFR H4/H5 | -110.0 | -137.5 | -27.5 | |
| SOFR H5/H6 | -39.5 | -26.0 | 13.5 | |
| SOFR H6/H7 | 4.5 | 9.0 | 4.5 | |
| EUR | 109.48 | 108.95 | -0.53 | |
| CRUDE (CLF4) | 75.54 | 74.07 | -1.47 | |
| SPX | 4559.34 | 4594.63 | 35.29 | 0.8% |
| VIX | 12.46 | 12.63 | 0.17 | |
