Super bad
June 6, 2022
–Rates eased a bit with tens down 1.5 bps to 2.917%. On the eurodollar strip whites ended down 1, reds +2.25, greens and blues +4.0. Although ADP was much weaker than expected, printing 128k vs 300k expected, Vice Chair Brainard said that she sees no reason for a September “pause” as Bostic had floated. Killing inflation is still job one, and to curb inflation the Fed has to slow demand. What’s that mean? Higher rates on very near contracts and slightly lower rates in the future as the economy slows. According to a report citing RBC, US car sales in May were at an annualized rate of less than 13 million, a “recessionary level”. Clearly supply chain issues are part of the problem. In front of today’s jobs report Musk said he would like to cut 10% of Tesla’s workforce due to a “super bad feeling” about the economy. Other executives are also issuing warnings. Chart attached is red/green ED pack spread, which is reversing its recent grind higher, and is back to being inverted by more than ¼% (-26.75s).
–If the Fed were to hike 50 in June, July and Sept, then the FF rate would be 2.25-2.5% (around the neutral moving target). The following Fed meeting is Nov 2, and the midterm election (speaking of super bad) will be Nov 8. If there were to be a pause, November is meeting to circle. Oct/Nov FF spread settled 28.0 (9774.5/9746.5) so there is a bit more than one hike priced there. Those in the pause camp might consider selling this spread. Also worth noting, is that over the next year of 2023, just one 25 hike is priced; that is FFF3/FFF4 settled 21.5.
–NFP expected 323k from 428k. The unemployment rate is expected 3.5% from 3.6%. Just for context, since 1980 there have only been two months with the unemp rate at the record low of 3.5, and that’s the first two months before COVID in 2020.
–Implied vol was crushed. Fed’s going to handcuff the economy and perhaps US rates will go into a flattening torpor. On the other hand, ERM2/ERM3 closed yesterday at a new record of 190 bps, a sign of considerable uncertainty in Europe.
