In a good place
Nov 1, 2019
–The treasury curve shifted lower by 10 bps or more. Tens fell 10.7 to 1.687%. Greens were the star performers on the euro$ curve, closing +13.625. It’s almost as if the Fed (unexpectedly) eased! The high contracts on the ED curve are June and Sept’21 at 98.625 or just 1.375%. Coincidentally, April 2020 Fed Funds settled at almost the same level, at 98.635, which indicates one more rate cut between the upcoming Dec, Jan and March FOMC meetings. (FFX9/FFJ0 spread settled -22.25). Current levels of EDM21 and EDU21 are a little more than 30 bps away from the highs made at the start of September of 98.945. The 30-yr bond yield of 2.174% is 20 bps away from its all time low.
–Near the end of the open-outcry session someone stepped in (on the screen) to fade the rally, buying 35k TYZ 130/129 put spreads for 19 (settled 18 ref 130-095) and 25k USZ 160/158 put spreads for 28 (settled 29 ref 161-12). Delta equivalents 8750 TY and 4750 US.
–Today of course, brings the Employment report, with NFP expected 90k (skewed by the GM strike) and Avg Hourly Earnings yoy 3.0%. Mfg ISM is expected 49.0 after a weak 47.8 last. Chicago PMI, released yesterday, was only 43.2, completing a round turn from the end of 2015 (chart below). Core PCE prices 1.7%, holding below target. Dallas Fed’s Kaplan speaks this morning, with Clarida at 1:00 EST. He’ll likely parrot the ‘economy is in a good place’ mantra. The PMI data is not in a particularly good place, and the fact that stocks continue to make new highs is either due to the fact that manufacturing is now a much less important aspect of the economy, or that the flood of central bank liquidity is the main factor. A bit of both… Clearly, rates are a huge tailwind for stocks. Brazil cut the benchmark selic rate to a new historic low of 5% yesterday, this rate having been at 14.25% in 2016. In 2016, Ibovespa was 40k, now it’s 107720.
–Phase One is underway. No, not the US/China agreement, but the impeachment process, with the House moving forward to set public hearings.
