I changed my mind
July 25, 2024
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–Weakness in equities failed to spark much of a flight-to-quality in rate futures. DJIA -1.25%, SPX -2.3% and NasdaqComp -3.5% but the ten year yield actually rose 4.8 bps to 4.288%. Front SOFR contracts moved higher but there was little sense of panic and no evidence of a ‘reach’ for otm calls. SFRH’27 forward closed LOWER on the day. Some curve measures made new highs for the year. 2/10 at -13 was up about 7 bps (the new 2yr partly responsible given the roll). Low this year in 2/10 has been -49.7, set one month ago on June 25. 5/30 new high at +38, just barely eclipsing the high made in January. Low of this year has been +1.7 bps in April.
–PBOC now cut the one-year benchmark rate by 20 bps to 2.3%. Japanese yen is making a new recent high this morning with $/yen 152.35. It was as high as 162 earlier in the month. Yen carry trades being unwound, contributing to weakness in US stocks and bonds. Yesterday former NY Fed President Dudley flipped to a position of advocating rate cuts in an op-ed column titled ‘I changed my mind’, and this morning El-Erian has an opinion piece strongly endorsing a cut in September… and suggesting the Fed throw the 2% inflation target out the window.
–Biden also changed his mind and formally withdrew from the presidential election race. I don’t quite understand how that ‘saves democracy’, but that’s the new slogan, and the mega donors are going to pound it into our heads until it has news-anchor commandment status. Well, wait a second, that might not be the greatest analogy…
–Q2 GDP first estimate released today, expected 2.0%. Core Prices expected 2.7% from 3.7%. Atlanta Fed GDPNow estimate is 2.6%, and NY Fed’s Nowcast is 2.0%. With Fed Funds 5.25 to 5.5%, rates can certainly be considered restrictive with room for an ease. However, I don’t think Powell is likely to change his mind on a 2% inflation target. The flip to FAIT in 2020 backfired spectacularly. Let’s now focus on the hard target.
–A Sept ease is still being fully priced, with FFV4 settling 9494.5, +2.5. Current EFFR is 5.33% or 9467. An ease should take it to 5.08% or 9492. So 9494.5 leaves a bit of room for the possibility of 50.
–5yr was a bit soft yesterday. 7yr auction today. PCE prices tomorrow. Trump is delivering comments at the Nashville Bitcoin Conference on Saturday.
–Copper continues to implode, with HGU4 now settling 410.90, below the 200 dma. This contract rocketed from 3.75 to 5.12 from February to May as the data center/ AI / power generation craze was pounded into our heads like something that would… save democracy. Now we’re going back to gas-combustion cars. You’ll pull into the Sinclair station. A clean-cut guy named Bob (embroidered on his nametag) is going to wipe your windshield and offer to check the oil. You’ll just pop your head out the window and say, Just fill’er up.
