Nov 5. SUPPLY (of political advertising)
–Rate futures closed at or near new lows on Friday with the ten year yield up 7.4 bps to 321.2. Modest bounce this morning but supply comes this week starting with today’s $37 billion 3 year note, followed by 10’s and 30’s Tuesday and Wednesday…$83 billion in total raising $29 billion in new cash. This is the opposite of QE, even if there wasn’t balance sheet normalization occurring by the Fed. The giant sucking sound is the US treasury taking in cash. To be fair, it’s not exactly the opposite of QE, as the US gov’t is spending the cash to juice up the economy and run election campaign ads. Feel better?
–Job report Friday was strong with NFP adding 250k and yoy wages +3.1% News today includes ISM Service PMI expected 59.3 from 61.6.
–Many markets have traced out similar moves to previous market action. For example, SPX has had about the same magnitude drop as that seen in February, but this one was more controlled and didn’t have as move of a vix surge. EEM. the emerging market etf, fell about 28% from May to August of 2015 during the energy rout, while this year it has fallen 27% from January to October. Crude oil had a huge rally of 18% from August to October, but has now erased that move and more. It’s tempting to think that things could stabilize here, but if they don’t, the continuation could get violent. The Fed wants to lean against the idea of providing a liquidity put, and FT has a headline this morning that BoJ’s Kuroda hints at tightening. It’s turning into a liquidity issue.
— Several liquidation trades Friday. Large selling of EDZ8 9725 straddle at 9 appears to have been exiting (perhaps forced?). 0EZ 9687/9675/9662/9650 put condor was sold at 6.0 covered 9678 in size 60k, also an exit; settled 6.25 vs 9676. As mentioned over the weekend, inflation indexed notes are making new daily highs, with tens providing a ‘real’ yield of 1.15% as of Friday.