March 15, 2018. Let the Good Times ….flatten?
–Yields declined and stocks faltered as Retail Sales fell, -0.1%. This data caused several analysts to mark down estimates of Q1 growth. Notably, the Atlanta Fed GDP Now projection plunged to 1.9% from 2.5% on 9-March. The first quarter has printed weak several times in recent years, but given the tax package it’s surprising. The idea of tax cuts sparking sustainable ‘animal spirits’ is becoming questionable, perhaps reflected in the PA election as well (narrowly claimed by the Democrat candidate). Midterm elections were to be dominated by the feel-good effects of tax legislation; are the benefits already fading?
–Tens fell 2.8 bps to 281.3. The curve flattened to new recent lows. 2/10 fell to 55.5 bps and 5/30 dropped over 4 bps to close below 45. Red/gold pack spread eased slightly to a new low of 23. There was a buyer of about 50k FVJ 114.5 calls for 6.5 to 7.0 with FVM trading 114-04 to 04.5. This call settled 6 ref 114-06 as others took advantage of the vol pop to sell lower strike calls on curve trades. April options expire one week from Friday. Previously this call buyer anticipated the large stock sell-off which caused a flight to the belly.
–Also of note were a few synthetic buys of EDZ9. Again, this is the contract with peak open interest of 2.27m contracts. First, there was a seller of 20k EDZ9 9700/9650 put spread at 14.5 (24d) which appears to be a roll down into the lower strike. The following trade is also of interest: +45k 0EZ 9750c vs -30k 3EZ 9725c for a credit of 4 to 4.5 bps. Settles were 9.75 (27d) and 16.75 (38d). 3EZ settled at a credit of 4.25. Trade is slightly long the market, and a synthetic steepener. A similar trade was done in June contracts. What’s interesting here is that this trade can quickly morph into a short position if the curve implodes on a rally. The difference between strikes is 25 bps, but the actual spread over the two years from EDZ19 to EDZ21 is just 10 bps! (9715 to 9705). EDZ8/EDZ9 closed -1.5 at 32.5.
–News today includes Philly Fed, expected 23 from 25.8. Also, TIC data is released this afternoon, perhaps of more interest than usual due to possible trade frictions. On a tangent, the US is claiming steel and aluminum production as vital to national security, while the Chinese are securing uranium and cobalt (Glencore agrees to sell 1/3rd of cobalt production to China). The relevance of various minerals and metals may become a larger topic going forward.
https://www.frbatlanta.org/cqer/research/gdpnow.aspx
