Positioning for NFP
April 4, 2024
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–New lows in treasury futures on heavy put buying first thing yesterday morning. TYM4 low 109-09+ which was -13+ and USM4 116-24 which was -31.
Big pre-data TY put buys
TY wk-1 109.00p cov 109-135, 11 paid 10k
TY wk-1 109.25p cov 109-125, 18 paid 15k
FV wk-1 105.75p 5.5 paid 50k
Week-1 options expire tomorrow, which is also the employment report.
–However, ISM Services and Prices lower than expected: Services 51.4 vs 52.8 exp and Prices lower than any time since 2020 Covid low, at 53.4 vs 58.4 expected. Both stocks and bonds reversed early weakness and traded higher. Curve edged slightly more positive. 2/10 squeaked out a marginal new recent high at -32.3; 2’s -2.3 bps at 4.676% and 10s -0.8 to 4.353%. SFRZ4 thru reds and greens +2 to +2.5. Powell often cites Services as a sticking point hampering the Fed’s inflation goal, so this report keeps easing hopes alive.
–Bowman talked about the discount window (it seems the Fed is getting ready for usage to ramp up since BTFP ended). Powell repeated that the Fed can wait to see how data develops before easing.
–There were also some large SOFR option plays: SFRN4 9462.5/9450ps 0.5 paid 35k, appears to be rolling up from 9450 longs. Settled 0.5.
SFRZ4 9600/9650/9700c tree bought for 0 to 0.25 30k and the 9600/9700c spd bought for 8.0, 25k. Open interest indicates that longs in the upper strikes were exited to roll into 9600 calls.
9600c 14.0 settle, open int +48k
9650c 8.5 settle, open int -9.6k
9700c 5.25 settle, open int -31k
The 9600c now have 185k open, the most of any call outside of the 9700 which still has 226k. Obviously the 9600 or 4% strike would take a lot more than three rate cuts to achieve.
–A more specific rate cut play was a sale of 30k FFN4/FFQ4 spreads at -8.5. The FOMC meeting is July 31, so anything that occurs at that meeting will not affect FFN4 but will be fully priced into FFQ4. In early Feb the spread was near -25, indicating near certainty of a quarter-point cut at that meeting. As easing hopes faded, the spread rallied (said another way, both contracts sold off, but August harder). The spread of -8.5 is about 1-in-3 chance of ease. Spread settled at 9483.0 (5.17%) and 9492.5 (5.075%) or -9.5. Note that current EFFR is 5.33% so the August contract has one ease fully priced (5.08%). There are three FOMC meetings before August, May 1, June 12 and July 31.
–A few more Fed speakers today but it’s hard to believe anything new will be said. Jobless Claims expected 215k. Trade figures. NFP tomorrow expected 200k.
