Warped signals
May 8, 2020
–The eye-opening news from yesterday was that FF futures traded above 100, that is, negative rates. FFZ0 settled 100.01 and the peak contract was FFM1 at 100.03. Contracts are higher this morning with the peak June’21 contract at 100.06 or minus 6 bps. Eurodollars of course, also saw a rally to new highs. Before this episode, reds had never settled above the 9975 strike. Current peak on the curve is EDM21 and EDU21, both having settled at 9982.5 or 17.5 bps. By the way, the two-year note also closed at that level, at 18 bps. Oh. and I suppose these prices imply forward lib/ois at around 20 bps.
–The message isn’t lost on stock indexes, with Nasdaq having closed higher than it started 2020, just shy of 9000. If there are no interest rates and the gov’t is handing out cash, might as well forecast NASDAQ 10k. In this new reality, the flows are all that matter and Paul Tudor Jones has reportedly embraced a long in bitcoin. Jump in.
–Of course, today we get the sobering news of the Employment report, expected to show a jobless rate of 16% and 22 million jobs lost. Which can only mean MORE. More action out of the Fed and federal gov’t. From a Reuters article quoting Erica Groshen, former commissioner of the BLS: “Our economy is on life support now. We will be testing the waters in the next few months to see if it can emerge safely from our policy-induced coma.” Nicely put. Real commodities are seeing bounces, though they are modest in scope. A lot of attention has been given to oil, but consider copper. HGN0 currently just a shade under 2.42, which admittedly represents a huge bounce from the March low around 2.10. But it started the year at 2.82.
–The other real world manifestation of the current environment can be glimpsed through the Consumer Credit report. This report is typically ignored, and data is for March, but still somewhat interesting. The balance on revolving credit (charge cards) actually fell over $28 billion from $1.094T to 1.066T. The annualized rate of decline is just over 30%. Makes sense. However, non-revolving credit (for student loans and pick-up trucks), increased by $16 billion. I guess that was for ‘home-schooling’ costs. Like frozen pizza puffs and peach sangria.
–It can all be summed up by Grandpa Simpson: Bart: “Didn’t you wonder why you were getting checks for doing absolutely nothing?” Gramps: “I figured cuz the democrats were in power again.”
