Strap in for NFP
July 7, 2023
–US 30y yield just above 4% at futures settle. 2y just above 5%, having surged as high as 5.12%. 10s added nearly 10 bps to end at 4.041%.
–ADP rose a whopping 497k in front of today’s payrolls which are expected 230k, but now with a wide dispersion of estimates. Leisure and hospitality added 232k jobs. The ADP figure sparked instant selling of rate futures, with red SOFR contracts plunging 24-24.5 bps at the lows, before coming back to settle -8 in the pack (avg change of the 4 contracts). Greens settled -14.375, blues -16.375. Steepening over this part of the curve is testament to Powell’s vow of keeping rates high longer, and likely negative for risk assets in general. The sell-off in back contracts, if sustained, represents a tightening of financial conditions.
–Lorie Logan (Dallas Fed President) gave hawkish comments, starting with the first line:
To put it concisely, I remain very concerned about whether inflation will return to target in a sustainable and timely way. And I think more-restrictive monetary policy will be needed to achieve the Federal Open Market Committee’s (FOMC’s) goals of stable prices and maximum employment.
https://www.dallasfed.org/news/speeches/logan/2023/lkl230706
–Vol ramped up hard. SFRM4 calls mostly unch’d to up 1 bp even as futures settled down 6.5. SOFR straddles all up 2-5 bps. TYU atm 110.5^ settled 2’43 or 8.2, highest over the past month. To give an isolated comparison, on March 8, as contracts made new lows just prior to SVB, the 7th quarterly was SFRU4 at a price 9569 and the 8th was Z4 at 9601. Long dated straddles on the two contracts were 135 bps and 144.5 with 555 and 646 dte. The ten year yield was 3.97%. Yesterday, the 7th was SFRH5 at 9598.5 and the atm straddle 162 bps with 617 dte. SFRM5 settled 9610 with straddle at 168.
–Attached is 30y yield chart. Fourth time testing 4% since December, with successively higher lows on pullbacks.
