Strikes and strikes
October 2, 2024
******************
–Background: Israel weathers strikes by Iran. Massive damage from Helene. Longshoremen strike; they’re against automation. Right. Let’s bring back all futures pits…my trading jacket is still hanging in the closet, ready for action.
–At one point ESZ4 was down 80 before coming back to settle -54.5 at 5759.75, down around 1%. In some ways that’s a strong showing. CLX4 settled 69.83, up 1.66, but it’s currently 71.70 and about to explode like a China stock.
–Ordinarily I would have expected a steepener and mad grab for the front end, but the official press narrative following Powell’s speech on Monday is that November will be dialed down to 1/4 ease. So, the “flight” was evident in longer maturities. Twos fell just 3 bps to 3.617%, while tens dropped 5.7 bps to 3.741%. SFRZ4 barely budged, up only 1.5 to 9597.5, while Z5 rose 5.0 to 9705 and Z6 +6.5 to 9702.5. Every contract over the 2 years from U25 to U27 is between 9694.5 and 9708…all clustered around 3%. Economic data shows weakness but has refused to completely roll over, and Powell has deftly guided towards a terminal rate that won’t be revisiting anywhere near the zero-bound. Events are likely to overwhelm both conditions (in my opinion).
–In terms of the Nov 7 FOMC, FFX4 had decent trade and settled +0.5 at 9544.5. The month has 30 days. The first seven days of the contract will price at the current EFFR of 4.83 and the other 23 days will either be 4.58 or 4.33 (assuming there’s not an emergency ease, and to me, that’s not zero odds). FFX4 should go out at either 95.3617 or 95.55334. The difference is 19.164 bps and the midpoint is 9545.752. So there’s a lean towards 25, just like there was in October. Now let’s place it in context. JPM has called for 50 and the world is under stress that (domestically) is likely to increase with the election. Do the math. I guess it’s not going to register until there’s an official proclamation from Timiraos, but I’d like to get ahead of that particular X post. I am not a buyer of the long end, but would personally want to own Dec FV calls and call spreads on SFRZ4. NOT RECOMMENDATIONS.
–It’s hard to ignore the inflationary implications of higher oil and supply chain bottlenecks from the strike. Big headwind for the long end, and probably for stocks. In fact, ten-year breakeven edged to a modest new high of 219 bps. But if bad things are happening, the Fed cuts. A lot.
–ADP expected 125k from 99k. Employment Friday.
