Got nothin’
December 17, 2021
–In Wednesday morning’s note I suggested the outcome of the FOMC press conference was likely to be a steeper curve and lower front end vol, as I imagined Powell would sound a dovish note. He was much more aggressive than I thought. But yesterday, the curve steepened and vol was crushed, punctured by a new sale of over 50k EDZ2 9900 straddles at 50 to 50.5. Settled 51.5, but that’s still down 5 from Wednesday’s settle of 56.5! The ten year yield fell 4 bps yesterday to 1.42%, but the two-yr note plunged over 6 bps to end at 62 bps, while the long bond was actually up nearly 1 bp to 1.86%. It was as if Powell HAD leaned against the hawkish dot signal.
–Many near euro$ calendar spreads made new recent LOWS, in spite of the fact that dots were moved higher for 2022 and 2023. The highest I had marked a one-yr calendar in this cycle fell just shy of 100 bps (or 4 hikes in a year), that being EDH2/EDH3 at 96. Yesterday, EDH2/H3 settled 82, down 8 on the day, as the red contracts (2nd year forward) exploded higher in price. June’22/’23 settled 76, Sept’22/23 at 70.5 and Dec’22/’23 at 53. The market is currently projecting a few near term Fed hikes…and that’s all it’s going to take to slow the economy and inflation. In all, yesterday’s price action was thin and somewhat confusing given Powell’s posture. Get used to it into the end of the year, maybe they won’t be black swans, but there’s a murder of crows haphazardly flying towards us.
–The Fed Effective rate has been 8 bps; January ’22 FF contract is 9991.5 or 7.5, so right on top of EFFR. The January’23 FF contract settled 9924.5 or 67 higher in yield than FFF2. I.e. 2.5 hikes.–Let’s say that the Fed is able to raise the FF target to 1.5% over the next two years. EDZ’23 is 9848 or 1.52%, so perhaps current pricing is appropriate. Well, the ten-year yield is only 1.42%. And we have a 20-year auction next week. Without the Fed buying, and without a steeper curve to provide a carry cushion beyond two years, how do government funding sales go? Not very well would be my guess. Probably a good thing that Build Back Better is being Bumped into next year.
–Nasdaq led the way lower yesterday with the composite -2.5%. Big cap tech was weak, with NVDA -6.8%, TSLA -5.0%, AAPL -3.9%, MSFT -2.9% AMZN -2.6%. These individual charts all look toppy. A pullback of government support coinciding with omicron fears could put the wealth effect into reverse. Some are embracing the reverse wealth meme; there’s a charming story about people in the Bay area leaving their car windows down and trunks open to show that there’s nothing worth stealing and to avoid having their windows smashed. I don’t have anything! Grab the tire iron out of the truck and smash the front windshield anyway, this guy is insulting us.
