Then suddenly
August 2, 2024
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–Monster day yesterday, as ten year yield plunged 13 bps to 3.975%, first time under 4% since the beginning of February. ISM Mfg quite weak at 46.8, with the employment component at just 43.4. Jobless Claims 249k, appears to be trending decisively higher. Near SOFR calendars made new lows while reds to more deferred made new recent highs. The most inverted 1-yr continues to be front SFRU4/SFRU5 which sank 14.5 to -148.5 (9504.5/9653). However, U5/U6 rose 6.5 bps to -24.5; previous 20-day range had been -26 to -37. Which is to say that reds outperformed on the curve. SFRM5 was the strongest contract, +23.5 to 9633.5. On the treasury curve, 2/10 did NOT make a new high, closing at -18 but 5/30 did, up 6 to +42.8.
–Weakness in equities with SPX -1.4% and Nasdaq Comp -2.3%. Continued selling this morning attributed to AMZN and INTC earnings, as good of an excuse as anything. This isn’t even much of a retracement, considering the move from late April to mid-July.
–Employment report this morning. Pretty clear that the Fed has shifted concern to jobs. NFP expected 175k…we just don’t know if that will come with a positive or negative sign!
–August is vacation month, when not much is expected to happen. However, a friend related a story yesterday of being away in August 2015…when China decided to devalue.
Fed’s easing in Sept. We KNEW that already
August 1, 2024
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–The financial press has sniffed out a scoop this morning: THE FED MAY EASE IN SEPTEMBER.
–October Fed Funds appropriately reflect the market’s odds of an ease at the Sept 18 FOMC. Currently, the EFFR (which FF contracts settle to) is 5.33%. An ease would put EFFR at 5.08% or 9492.0 in price. Oct Fed Funds have settled at 9491.5 or higher since July 11. Yesterday’s settle was 9495 or 5.05%, down -0.5 on the day. In other words, the market has essentially priced certainty of an ease for weeks.
–Not much else emerged at the press conference, though rate futures surged coming out of Powell’s appearance, with Iran’s vows of retaliation against Israel likely boosting a safe haven bid. For example, TYU4 settled 111-26, +8. Open interest jumped 51k, a sign of continued long accumulation. TYU 112.75c settled 20, but were bought in size of 15k for 24 post-settle. Late in the session TYU4 was trading 112-08 and is 04+ as of this note. At futures expiration, the Five-yr was yielding 3.996%, the first sub-4% since February. Late price in CLU4 (WTI crude) was 78.48, +3.75 on the day.
–The story isn’t so much whether or not the Fed eases in September (they will). The larger question now concerns the magnitude and pace of ease. The market is providing some clues, which could just as easily be an overshoot as an undershoot. New low in SFRU4/SFRU5 at settle at -134 (9496.5/9630.5). Just after settle the spread traded -140 (9497/9637). So we’re getting around the idea of 5 to 6 eases in a one-year period. Crazy? I take a sidelong glance at the world’s news and that doesn’t even begin to approach the level of crazy.
–Today’s news includes Jobless claims expected 235-240k. ISM Mfg 48.8 from 48.5 last. Tomorrow’s NFP expected 175k. META soared 6% on its earnings release post-close. Today AAPL and AMZN.
BOJ hikes. FOMC today
July 31, 2024
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–FOMC today. While no move is expected until Sept, attached chart of SFRU4/SFRH5 six-month calendar made a new low settle of -81. SFRU4/U5 new low settle -131.5. So forward easing expectations are strengthening. Sept FOMC is on the 18th.
–Treasury releases composition of auction issuance today. Yields eased yesterday, with tens -3.5 bps to 4.141%, TYU4 settled 111-18, nearing the strike of peak open interest in TYU calls, namely the 112 c which settled 34/64s with 40 delta, open interest of 198k following last week’s heavy buys.
–BOJ hiked to 0.25%. $/yen sank to 150.50 having been as high as 162 earlier in the month.
–MSFT crushed on post-close earnings report, but major indexes higher this morning, apparently as a result of the weaker USD. META releases today. CORRECTION from yesterday: I said AMZN and NVDA released Thursday but it’s AAPL rather than NVDA.
–JOLTs much stronger than expected yesterday, but according to this article on ZeroHedge it’s due to government hiring:
“Putting it all together, while private sector job openings plunged to a level seen back in late 2018, government job openings are just shy of a record high!”
I’ve heard of Multi “Grain”…
July 30, 2024
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–Treasury borrowing estimate for July-Sept was cut to $740 billion from an original estimate of $847b. Little reaction in treasuries… slight bid. Same with stocks but they eased back into the close. Ten year yield fell 2.2 to 4.176%.
–MSFT earnings this afternoon, AMD as well. META on Wednesday. AMZN and NVDA Thursday. Total market cap MSFT, META, AMZN and NVDA is $9 trillion. National debt is $35 trillion. Nominal GDP $28.6t.
–Other news today includes JOLTs expected 8000k from 8140 last. Conference Board Consumer Confidence expected 99.7 from 100.4 last. Since early 2021 following Covid there have only been four instance of Confidence below 100. Democratic National Convention just three weeks away in Chicago. See Venezuela.
–In front of tomorrow’s FOMC, Nick Timiraos reassures us with the news everyone has been anxiously awaiting from the NY Fed:
Multivariate Core Trend (MCT) inflation decreased to 2.1 percent in June from 2.4 percent (unrevised) in May.
I have no idea what MCT is, but it’s at the Fed’s target. Mission accomplished.
Questionable Rotation Advisory (QRA)
July 29, 2024
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–Yields fell on Friday, with the 5y leading, down over 6 bps to 4.08%. This morning 2 and 5 yrs are at new low yields for the move. Twos are just under 4.37% having been over 5.03 at the time of the last Treasury Quarterly Refunding announcement. The low yield this year was set in January at 4.145%. Fives are currently 4.046%, high of the year at last QRA was 4.72%. The low of the year in the 5y was 3.81%, set on February 1, just after the January 31 QRA. I didn’t read the Roubini and Miran paper on treasury market manipulation, but it’s remarkably coincidental that highs and lows in 2’s and 5’s occur at these exact moments. Treasury borrowing estimate released today, schedule of issuance on Wednesday. Image of 5y attached
https://www.reuters.com/markets/us/hedge-fund-study-us-treasury-issuance-fuels-debate-2024-07-26
–FOMC Wednesday. BOJ also Wed. BOE Thursday.
Echoes of 2007
July 28, 2024 – weekly comment
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Is the SOFR futures curve correctly forecasting the Fed’s easing schedule? My answer is that it provides clues, but the main takeaway is only that we’re getting closer to rate cuts, and the inversion in the near one-year calendar, SFRU4/SFRU5, at a level of -128 bps, near a new low, is a market signal that provides substantial cover for the Fed to commence easing the FF target. That is, the 1-yr forward SFRU5 contract at 9624 or 3.76% is over 1 ¼ pct lower in yield than the near SFRU4 contract at 9496 or 5.04%.
There seem to be some parallels between now and 2007, when the Fed initiated the first ease in September. At that time, unsustainable indebtedness was being shouldered by the household sector, mostly in the form of adjustable rate mortgages. Currently, the debt problem is arguably larger, but is centered on the Federal Gov’t, radiating out to the rest of the populace.
Below I simply briefly compare similar one-year calendars in two time-frames: going into the first ease in 2007 and now. In 2007 the benchmark short-end futures were Eurodollars, and now it’s SOFR, but the spreads are similar. The chart below is the 1st quarterly to 5th quarterly ED on a rolling basis.
The period from mid-June 2007 to mid-Sept would have been EDU07/EDU08. The spread declined somehat aggressively stating in August, moving from -44 to -130. Was -130 “right”? The first ease was 50 bps, and in less than eight months the FF target was cut from 5.25% to 2% (yellow to red vertical lines). The inversion was of course, warranted, but -130 was nowhere close to capturing the ultimate magnitude of easing. It was pretty obvious at that time that there were serious financial stresses that ballooned in August, Here’s a link to Bernanke’s Jackson Hole speech on Aug 31, 2007.
https://www.federalreserve.gov/newsevents/speech/bernanke20070831a.htm
Here are a couple of interesting snippets:
In the statement following its August 7 meeting, the Federal Open Market Committee (FOMC) recognized that the rise in financial volatility and the tightening of credit conditions for some households and businesses had increased the downside risks to growth somewhat but reiterated that inflation risks remained its predominant policy concern.
On August 17, the Federal Reserve Board announced a cut in the discount rate of 50 basis points and adjustments in the Reserve Banks’ usual discount window practices to facilitate the provision of term financing for as long as thirty days, renewable by the borrower. The Federal Reserve also took a number of supplemental actions, such as cutting the fee charged for lending Treasury securities. The purpose of the discount window actions was to assure depositories of the ready availability of a backstop source of liquidity. Even if banks find that borrowing from the discount window is not immediately necessary, the knowledge that liquidity is available should help alleviate concerns about funding that might otherwise constrain depositories from extending credit or making markets
Clearly, at the August 7, 2007 FOMC, the Fed didn’t grasp the severity of the situation. Cramer did though, having gone on an epic “They [the Fed] know nothing!!” rant on August 3, 2007.
https://www.youtube.com/watch?v=TaKnDMv6ceg
From the August 7, 2007 Fed statement (emphasis added. Can’t always believe what they tell you):
Financial markets have been volatile in recent weeks, credit conditions have become tighter for some households and businesses, and the housing correction is ongoing. Nevertheless, the economy seems likely to continue to expand at a moderate pace over coming quarters, supported by solid growth in employment and incomes and a robust global economy.
https://www.federalreserve.gov/newsevents/pressreleases/monetary20070807a.htm
Is now like then?
There was a post on X the other day:
Tell me why again there should be an aggressive easing cycle with:
* Real GDP growth at 2.8%
* Core PCE price growth at 2.9%
* Stocks up double digits this year and just off all time highs
* Spreads near secular lows
My response: IN 2007:
Real GDP Q3 2.3% .
Core PCE prices 2.0 in Q3, 2.8 in Q4. 2007
YTD SPX +9.5% by July.
BBB corp spd was 1.31 in June’07, 1.26 now.
We know what happened at end of 07 and 08. Not saying it’s the same…BUT IT COULD BE
The only point of this tiptoe through the past is to examine one little ear-mark of financial conditions, the one-year SOFR calendar spread, to see if the signals are similar. From the end of May until now, the spread has declined from -68 to -128. A slight echo of August 2007.
Chart of the current rolling spread below. Note, in euro$’s, we used 1st to 5th, but in SOFR, because the ‘first’ quarterly continues to trade past the IMM date, we use 2nd to 6th.
The FOMC next week is likely a dead issue. Unlike 2007 there are NOT obvious signs of stress coursing through financial firms. The exact opposite could be argued. However, the lower end of the consumer spectrum is pulling back quickly, and the political situation is creating some degree of angst.
The only real conclusion is that the past isn’t always a burden, but we can learn a few things about possible outcomes from it.
****************************************************************************
October Fed Funds settled 9495, assuming that Wednesday’s FOMC is dead, a 25 bp cut in September would mean a new Fed Effective of 5.08%, leading to a final settle in FFV4 of 9492. The market is indicating small odds of a 50 bp cut (like 2007) at the Sept meeting. I would guess that some time after Wednesday’s FOMC, this contract will trade 9502, indicating a 50/50 chance between 25 and 50 bp ease.
In March’25 SOFR, peak call open interest is represented by the 9675/9775cs which settled 5.25 ref 9575 (both strikes around 225k open).
This week’s news includes the Treasury Refunding Announcement and Wednesday’s FOMC meeting. Employment report on Friday.
____________________________________________________________________________________
| 7/19/2024 | 7/26/2024 | chg | ||
| UST 2Y | 446.3 | 438.9 | -7.4 | |
| UST 5Y | 414.8 | 408.0 | -6.8 | |
| UST 10Y | 423.9 | 419.8 | -4.1 | |
| UST 30Y | 445.0 | 445.5 | 0.5 | |
| GERM 2Y | 278.4 | 262.2 | -16.2 | |
| GERM 10Y | 246.7 | 240.7 | -6.0 | |
| JPN 20Y | 183.1 | 182.7 | -0.4 | |
| CHINA 10Y | 226.0 | 219.0 | -7.0 | |
| SOFR U4/U5 | -122.5 | -127.5 | -5.0 | |
| SOFR U5/U6 | -29.0 | -30.0 | -1.0 | |
| SOFR U6/U7 | -1.0 | -0.5 | 0.5 | |
| EUR | 108.85 | 108.60 | -0.25 | |
| CRUDE (CLU4) | 78.64 | 77.16 | -1.48 | |
| SPX | 5505.00 | 5459.10 | -45.90 | -0.8% |
| VIX | 16.52 | 16.39 | -0.13 | |
Focus on prices, but that’s no longer the main driver
July 26, 2024
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–News today includes the Fed’s preferred inflation gauge, PCE prices. Expected 0.1 from 0.0 month/month and 2.4 from 2.6 yoy. Core 0.2 from 0.1 with yoy 2.5 from 2.6.
Note, yesterday’s Core PCE QoQ was higher than expected at 2.9%. Olympics begin. Trump speaking at Bitcoin conference in Nashville tomorrow. FOMC Wednesday.
–Ten year yield fell 3.4 bps to 4.254%. Curve flattened after making slight new ytd highs on Wednesday. 2/10 went out at -18.7 (down 5.5) and 5/30 at 35.5 (down 2.7). From open interest it appears as if there was heavy long liquidation in TU and FV as open interest in those contracts fell 81k and 27k. TY open interest jumped 41k, likely related to large option flows. There was a buyer yesterday of >100k TYU4 112c. High price paid was 31 for 50k covered 111-045 with 31d. Final settle was 22 vs 110-255 (28d at that level), so marked well against the peak buys. Open interest in the calls was +102k so obviously new. August treasury options expire today. In TYQ 111.25p there were liquidating sales at 31 and 32. Open interest in that put fell 22k. (settled 31, 29 itm). Vol firmed across treasuries. TYU atm 110.75^ settled 1’35, or 6.2, still probably a bit cheap. Yen carry adjustments appear to be the biggest driver; $/yen slightly higher this morning at 154.25.
–Flattening most evident on SOFR curve (from reds back). SFRZ4 unch’d at 9534.5, Z5 DOWN 3 at 9631.5, Z6 unch’d at 9648.5, Z7 UP 2 at 9645.5. While SFRU4/U5 rose 4.5 to -123.5. Euribor U4/U5 made a new low settle at -97.
–What’s the state of the ‘aspirational’ US consumer? LULU Lemon yoga pants half off! On January 2, LULU was 505.38. Yesterday, 247.32.
Euribor calendar pictured below
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.
Exit Doors
July 24, 2024
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–Solid 2y auction at 4.434, 2.81 bid/cover. Philly Fed Services at -19.1 were at the very low end of the range for the past four years.
–Yields fell slightly. Tens down 2 bps to 4.24%. Five-yr auction today. Other news includes S&P PMIs and New Home Sales.
–Stocks starting the day on the back foot. Both GOOGL and TSLA reported; pre-market -3% and -7%. ESU -43,75 at this writing, 5555.50. Like Joe, investors are heading for the exit doors.
–Yesterday I mentioned TU calls; contract +2.25 to 102.1625 and Sept 103c from 3.5 to 4.5. Sept Copper continues its slide, but held the 200 dma yesterday with a low 413.55 (200dma 412.30). The high in May was almost exactly $1 higher at 513. Eurozone PMI weak this morning. Yen continues to recover and $/yen is now below 155, lowest since May.
–A month ago Karine Jean-Pierre floated the idea that clips portraying Biden as frail or shaky were ‘deep-fakes’. Biden is to address the nation at 8 pm today about his forced exit.
TU (2yr) calls for earthquake insurance
July 23, 2024
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–Quiet Monday. Early weakness in curve and treasury futures abated. Tens closed up 2.1 at 4.26% while twos were up 1.6 to 4.521% (new twos being auctioned today). Though some had considered next week’s FOMC to be in play for a longshot ease, near contracts closed a couple of bps lower. SFRU4 9491.5s, down 2. FFV4 settled 9491 (-1.5) or 5.09%. First time that contract has settled below 9492 (which is exactly one 25 bp cut) since the July 11 CPI data. FFQ4 settled 9468 or 5.32%.
–Biden was supposed to meet with Netanyahu today, but the meeting was cancelled (and possibly pushed back) in midair. There is talk that Harris would not meet with Netanyahu in Biden’s stead. I would point up the risk of a change in policies (foreign and otherwise) with the new presumptive nominee. Issues might be compounded if Biden is in the midst of a more serious health problem. Uncertainties are perhaps underpriced. Even treasuries might see some shading around their “risk-free” status.
–From Matt Taibbi (regarding Biden’s letter of withdrawal)
The letter wasn’t posted on the White House briefing room site, even as lesser news (including a statement purporting to quote Biden at length on “climate pollution reduction grants”) was posted yesterday. It was furthermore written neither on presidential stationery nor under campaign letterhead and appeared rushed, thanking Vice President Kamala Harris for “being an extraordinary partner,” but not endorsing her.
–Two-year treasury options aren’t particularly active, but in case the Dem Convention turns into a disaster (August 19-22) it’s almost worth considering buying TUU 103c which settled 3.5 ref 102-14. Sept treasury opts expire Aug 23. These are around one-quarter pct otm. [THIS IS NOT A RECOMMENDATION. IT IS ONLY TO NOTE THAT SEPT TREASURY OPTIONS CAPTURE THE CONVENTION. TO MY KNOWLEDGE, NANCY PELOSI DOES NOT HOLD A POSITIION IN THESE OPTIONS]
