Service ISM to Confirm Mfg Weakness?
Oct 3, 2019
–Yields fell and the curve steepened at SPX fell 1.8% yesterday. Besides the technical and seasonal aspect to the decline in equity markets, I would attribute the fall to several reasons 1) Mfg ISM underscored global mfg weakness 2) Political impeachment drama and a shift left 3) WeWork implosion caused renewed uncertainty about (tech) valuations 4) September’s repo spike leaves nagging worries that perhaps funding isn’t quite as readily available as we all take for granted 5) the Saudi situation points to less stability in the mideast.
–On point number one, Service ISM is released today, expected 55.1 vs 56.4 last. A number that confirms mfg weakness will be problematic. Additionally, the trade war has definitely had an impact, and tariffs on Europe were just announced late yesterday. However, stocks didn’t react to the announcement and actually edged a bit higher, and EUR also shook off the news.
–Regarding point two, Jim Bianco put out an interesting tweet that in the immediate aftermath of news that Bernie had a stent procedure, Warren had picked up his supporters at the expense of all others, leaving her as the undisputed front runner. Obviously hard to trust an instantaneous poll, but that scenario makes sense.
–Nothing more to say about 3…reverberations will be felt in real estate and IPOs. On four, Evans was out saying the Fed might have to respond to economic shocks, a day or two after saying rates were about right. Monetary policy and repo calibration uncertainty.
–On point five, Reuters had a piece saying internal dissatisfaction with MBS is increasing.
–In terms of US rates, several measures of the curve edged to new recent highs. 2/10 +2.4 bps to 11.2, 5/30 +4.5 to 65.3 and red/gold euro$ up a bit over 1 bp to 17.375. Heavy buying of near calls again. For example, EDZ9 9837/9862 c 1×2 0.5 paid for another 50k. EDX 9850c were bought 40k for 1.75 (exit). Open interest in EDZ9 calls peaks with the 9825c at 590k, with 9837c 471 and 9850c 449k. Some technicians suggest that the market gravitates to peak OI, which would suggest a couple of more Fed eases, further corroborated by Oct/Jan FF spread which fell 5 bps yest to -36.5.
