Payroll Friday (when no one is actually working given the 4th holiday)
July 5, 2024
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–Yields fell Wednesday in the wake of a weak ISM Services number. On Monday ISM Mfg was 48.5 and Wednesday the Service side was 48.8 (expected 52.5). Both are now in contraction territory, with the Service Employment number at just 46.1. Goods inflation has already been moderating, it looks like services might follow suit. Today is the Payroll data, with NFP expected 190k. Get ready for the Unemp Rate to tick over 4%; the last time it was 4.1% was in November of 2021.
–On Wednesday 10’s fell nearly 9 bps to 4.345%. On the SOFR strip greens, blues and golds (3rd, 4th and 5th years forward) were +10 to +10.5 with prices clustered around 9630 or 3.7%. Forward expectations of rates appear quite comfortable around 3.5 to 3.75% for the time being. Of course, the large recent 100 bp wide call spread being accumulated for around 4.5 bps is SFRH5 9675/9775cs which settled Friday at 4.75 ref H5 9545.5 (Lower strike is just 3.25%). This trade would perform best in an environment of rapid easing (seen in 2001 and 2008). Interestingly, there is now also buying of 100 bp wide PUT spreads. On Wednesday, a new buyer of 30k SFRZ5 9562.5/9462.5 ps for 26.75 to 27; settled 24.75 vs Z5 9605. In the Fed’s latest dot-plot the 2025 FF projection was 4.1 or a price of 9590. If the Fed’s right, then this put spd expires worthless. Of course, the put spread works best if the Fed NEVER eases. Just as a point of comparison, the contract in front, SFRU5 settled 9590, and the same strikes ps settled 26.5. So curve roll-down is pretty much like paddling in place over the near term.
–October FF, which provides a decent guidepost for easing expectations at the September FOMC, settled 9487 or 5.13%, up 1.5 on the day. Current EFFR is 5.33% or 9467 so an ease would take it to 5.08% or 9492. Therefore current ease expectations are around 80%.
