Payrolls & Powell
March 7, 2025
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–Payrolls today expected 160k from 143 last. Unemployment rate expected 4.0%, unchanged from last. Powell speech on the Economic Outlook at 12:30.
–Midcurve March SOFR options expire in one week. 0QH5 9643.75^ settled 20.25 (ref 9643.5), quite high for a one-week period, but not an easy sale given the backdrop.
–Yesterday’s action was dominated by weakness in equities, SPX -1.8% and Nasdaq Comp -2.6%. There’s plenty of chatter about oversold conditions, 200 day moving averages, bear market bounces. However, the broader geopolitical environment is undergoing a massive generational shift, necessarily impacting capital/investment flows. For now, uncertainty is restraining risk appetite. Short-term technical considerations and economic data are just noise. I’m not saying that equities necessarily have an abrupt shift lower, just open to that possibility in a broad spectrum of scenarios. Crashes don’t occur from highs, but rather from lows. In the first two years of Reagan’s first term, SPX fell nearly 30%.
–Yesterday Waller rejected the idea of a March ease, yet April FF still settled 9570 or 4.30%, 3 bps of premium to the Fed Effective of 4.33. Waller did add ‘there’s nothing wrong with a forecast of 2 rate cuts this year’. July Fed Funds settled +5.5 at 9599.5 or 4.005%. So FFN5 has more than one ease priced, with three FOMC meetings before-hand: March 19, May 7 and June 18.
“Bessent says he will pursue reform of the enhanced SLR ratio to prevent it from acting as a binding constraint – to improve Treasury market intermediation” (Nick Timiraos). Translation, we’re going to need to find buyers for all these bonds: the big banks. TBTF banks siphoned a lot of low cost deposits post-SVB, so even though repo rates presently indicate negative carry, the big banks have plenty of cushion.
–One notable pre-NFP trade: buyer of 50k FVJ5 108/108.5cs 8.5. Settled 10.5 ref 107-2575. Curve was again steeper with red SOFR contracts to deferred making new highs. SFRM5 +5.0 9600.5, M6 +1.5 9646 (peak contract), M7 +0.5 9637.0, M8 -1.0 9624.5.
So, SFRM5/SFRM6 1-yr calendar is NEGATIVE 45.5 in expectation of lower future rates, while SFRM6/M7 is POSITIVE 9 (new recent high).
The surge in German bund yield (40 bps this week) has spilled over into the US curve. US 2y FELL 2.1 bps to 3.965% while 10s ROSE 2.3 bps to 4.286%.
