Taketh Away
April 6, 2025 – Weekly Comment
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We all know what happened.
SPX and Nasdaq 100 made new all-time-highs in mid-February. From Tuesday, pre-Liberation day, to Friday’s close, SPX down 12.2% and NDX down 14.2%. From Feb highs to Friday, SPX -17.4% and NDX -21.5%. Worth noting is that from the high at the start of 2022 (4794) to the low in October (3583), SPX fell 25%. We’re not there yet.
As of Friday’s close, we’ve retraced 42% of the 2022 low to February’s high. Massive increase in perceived wealth followed by a loss in perceived wealth.
Halfway back would be 4863, and the 2022 high was 4794. Should be a support area. Now 5074.
The questions are: what’s an appropriate template going forward for markets and the economy? Is this a sea-change in global trade and standards of living?
In Q4 2018, the Fed was in a hiking/QT regime, and SPX fell 20% in Q4. Though there was an emergency Treasury dept meeting and announcement, the Fed’s final hike was in December (followed by a delayed pivot and ease at end of July 2019). Rates had, of course, anticipated the ease, as twos fell from around 2.75% in mid-Dec 2018 to 1.75% by June 2019. Currently twos have fallen from 4.36% in Feb (pretty much equal to current EFFR of 4.33) to 3.66% Friday, or 70 bps.
The COVID sell-off in Q1 2020 went from a high in SPX of 3386 on Feb 19 to 2237 on March 23, a loss of 34%.
My personal bias is that this week’s actions could lead to further deterioration in global trade, and a generational stall/decline in US living standards. I could easily be wrong, but I don’t think this damage is undone with a pen stroke. Powell said on Friday that the Fed is in no hurry to cut rates, and is looking for confirmation in hard data. He expects tariffs “…are likely to raise inflation in coming quarters.” The market is telling us the Fed will be easing shortly, and that the decline this year is likely to be larger than the 50 bps penciled in at the March Survey of Projections for 2025.
May FF settled Friday at 9575.5. The FOMC is 7-May. No ease is 9567, an ease of 25 bps would be 9586.5 (7*4.33 + 24*4.08)/31. So as of Friday, not quite 50/50. The last FOMC of this year is 10-Dec. January 2026 FF settled 9668.5 or 3.315%, essentially 1% lower than the current EFFR of 4.33%, or twice as much as the Fed projection. FFF6 rallied 27 bps on the week. Peak contract on the SOFR strip is still the sixth slot (2nd red), SFRU6 at a price of 9693.5 or 3.065%. That contract traded a high price of 9719.5 on Friday.
For the sake of comparison, I am adding a chart of the rolling FIRST red, delineated by BBG as SFR6, on a chart going back almost to the start of this hiking cycle. First red, currently SFRM6 at 9690. Friday high was 9716.5.
The chart makes it look pretty easy. Sell it up here and book a 75 bp profit. However, the last couple of times the FF target was 50 to 100 bps higher than it is now. So no, it’s not that easy. Also, the last couple of times, the economy was in a period of fiscal dominance. Now we’re in a period of fiscal retrenchment. I’m not saying reds won’t retrace 50 to 75 from Friday’s close. Just saying it’s a little different.
The Fed eases to maintain economic activity in the face of uncertainty. On Friday Powell indicated the Fed can be patient. I don’t think so. JPM says 60% chance of recession. I don’t think so. We are 100% in the midst of recession now. Q1 GDP advance is released April 30. Atlanta Fed Q1 GDPNow is -2.8%. Gold-adjusted it’s -0.8%. Next payroll data May 2. FOMC is May 7.
Powell on Friday:
The limited hard data are consistent with a slower but still solid growth outlook. At the same time, surveys of households and businesses report dimming expectations and higher uncertainty about the outlook. Survey respondents point to the effects of new federal policies, especially related to trade. We are closely watching this tension between the hard and soft data.
Turning to monetary policy, we face a highly uncertain outlook with elevated risks of both higher unemployment and higher inflation.
While uncertainty remains elevated, it is now becoming clear that the tariff increases will be significantly larger than expected. The same is likely to be true of the economic effects, which will include higher inflation and slower growth. While tariffs are highly likely to generate at least a temporary rise in inflation, it is also possible that the effects could be more persistent.
Just a couple of more market notes. On a settlement basis, CLK5 (WTI) fell 10.6% this week. Low for the front contract since 2021.
Ten year treasury-tip breakeven fell 19 bps this week to 218. Low of last year, since 2021, was 203. High so far this year is 247.
Remarkable that 2/10 is just sitting in middle of this year’s range. Last at 33, high in Jan is 42. Red/gold spfr spread 42.75, new high for the year and just thru last September high of 41. I would expect further steepening.
BBB corporate to 10y treasury spread has risen from 104 bps in mid-Feb to 136 now. Yen-carry peak in August was 139. A few weeks ago I had mentioned HYG (hi-yield etf). I was long some puts for March expiry that barely scratched out a profit. Wish I reloaded, but I didn’t. That’s just the nature of trading. HYG low close in March was 78.52. This week a plunge down to 76.76, again, testing the level of the Aug 5 yen-carry volatility.
I now think red SOFR contracts see a soft cap around 2.5% or 9750. Could easily see spikes above that level, but I don’t think they would be sustained. To give an indication of a reach, on Friday SFRZ5 9900c 4.0 paid 10k. Settled 3.0 ref 9665.5. SFRZ5 9800c settled 8.5.
On the week, the contract that rallied most was the peak SFRU6, up 35 to 9693.5. However, on Friday the front contracts were strongest, with SFRM5 and SFRU5 both +10.5, to 9607.5 and 9642.0. Friday to Friday, SFRM5 +14 and U5 +22.5. I think SFRM5 can ultimately settle 9618 to 9625.
| 3/28/2025 | 4/4/2025 | chg | ||
| UST 2Y | 390.6 | 366.8 | -23.8 | |
| UST 5Y | 397.9 | 371.2 | -26.7 | |
| UST 10Y | 425.3 | 399.1 | -26.2 | wi 398.0 |
| UST 30Y | 463.1 | 438.9 | -24.2 | wi 439.3 |
| GERM 2Y | 201.9 | 182.7 | -19.2 | |
| GERM 10Y | 272.7 | 257.8 | -14.9 | |
| JPN 20Y | 224.5 | 195.6 | -28.9 | |
| CHINA 10Y | 181.5 | 172.0 | -9.5 | |
| SOFR M5/M6 | -62.5 | -82.5 | -20.0 | |
| SOFR M6/M7 | 3.0 | 5.5 | 2.5 | |
| SOFR M7/M8 | 15.0 | 16.0 | 1.0 | |
| EUR | 108.28 | 109.61 | 1.33 | |
| CRUDE (CLK5) | 69.36 | 61.99 | -7.37 | |
| SPX | 5580.94 | 5074.08 | -506.86 | -9.1% |
| VIX | 21.65 | 45.31 | 23.66 | |
| MOVE | 96.83 | 125.71 | 28.88 | |
