Where there’s smoke
September 27, 2023
–Stocks tumbled yesterday with SPX -1.5% and Nasdaq Comp -1.6% (though there’s a small bounce this morning). 30y bond yield continues to lead rates higher, ending 4.687% at futures settle, up 4.2 on the day. Shorter maturities unchanged to up slightly. New recent highs in 2/10 at -57 bps and 5/30 at +7.2. Fed Funds: November FFX3 settled 9462.5, 5.375% and FFF4 9456.5 or 5.435% vs Fed Effective 5.33. Market leans toward the idea of the Fed standing pat at the Nov 1 FOMC; Jan isn’t even at 50/50 for the Dec 13 meeting.
–In SOFR options there are more targeted easing plays focused on SFRH4. For example a buyer of 30k SFRF4 9462.5/9468.75/9481.25/9487.5c condor for 1. Max value 12.5 between middle strikes, with underlying SFRH4 near the lower strike at 9461. Similar idea +20k SFRH4 9475/9487.5/9500/9512.5 c condor for 1. Max value 12.5 between middle strikes. This one requires an actual ease, but not the prospect of emergency cuts (which could conceivably take us through the top strike). Additionally, there is continued accumulation of SFRM4 9600/9700c spread 7.0, now up to about 150k total position. Settled 12.25 and 5.25 ref 9479. This trade requires easing that is more aggressive. That’s what it’s all about now: when the easing starts, is it measured, or an emergency? The fiscal bullets are now spent, so it’s all going to be on Powell’s shoulders when the embers left in the ashtray are knocked over by the cat, and catch on the tablecloth, and the conflagration starts. And that’s more along the lines of the buy of 10k FVX 108 calls for 3.0. About 65 bps away, with the current cash 5y 4.625%. Like putting out fire…with gasoline.
–Today’s news includes Durables and the 5y auction. One last tidbit: CLX3 is 91.84 as of this writing, close to the high tick of the month at 92.43. On the 4th of July it was 70. As Dec Copper makes new lows.
