Wide range of outcomes
November 14, 2024
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–PPI today but the only thing that matters is Powell, on the Economic Outlook, at 3:00.
–Big steepening rebound yesterday. 2y yield was DOWN 6.1 bps to 4.379% while 30s were UP 6.1 to 4.636%. As can be seen on attached chart, that’s a new high bond yield. 5/30 had made a new recent low Tues at 26 bps, but snapped back yesterday to 33.7 (5y yield -1.5 to 4.299%). Strongest SOFR on the board was M5, + 10.5 to 9601.5. By contrast M6 +3.0 to 9616.5, M7 -0.5 to 9616.0. Nov SOFR midcurves expire tomorrow, ATM settles: 0QX4 9612.5 = 8.0, 2QX4 9612.5 = 8.0, 3QX4 9612.5= 7.5. These are all down from about 13 the day before. Dec treasury options crushed. TYZ4 109.5^ settled 62 on Tuesday ref 109-135, and 49 yesterday with unch’d futures (Dec opts expire 22-Nov).
–New high DXY yesterday over 106.50, and this morning it’s around 107.0. (Level of USD is one factor in financial conditions; bonds and USD are tightening). Rishi notes the 30y yield is above SOFR (4.60) and EFFR (4.58) for the first time in years. Forward SOFR contracts are locked up ~ 3.85% – all contracts from SFRZ5 to SFRZ8 are between 9612.5 and 9616.5. Throw a blue dart for one to buy and a red dart for one to sell. From many standpoints, it seems to me that the market perceives an easy glide into inauguration. Or maybe paralysis. I don’t think so.
–Reasons for front end strength and related steepener are mostly pinned to CPI which came out as expected, yoy 2.6%. Lame excuse. I saw a snippet saying Citi still going for 50 in December. I feel as if something from Powell’s comments today might have leaked, but that’s just wild speculation.
–With respect to odds of ease in Dec: FFZ4 settled 9551.5. FOMC is Dec 18. EFFR is 4.58. On an ease, contract should settle a shade below 9552.5. On no ease, 9542.0. So every bp is ~10% in terms of odds. Pay 1 (sell 51.5’s) to make 9.5? Pretty cheap put…but what if Citi’s right? Or pay 2.25 for SFRZ4 9556.25/9543.75 to make 9.75. Of course, SFRZ4 options expire pre-FOMC on 12/13. But there’s a limit on the risk.
–I feel like there’s a lot “wrong” with current pricing. Stocks too high given valuations and high forward yields. Long end treasury yields still too low. Vol should perhaps be higher both MOVE and VIX. Curve should be steeper. Of course, I can make good arguments why all the former conditions are “right”. Stocks expect high forward growth; inflation is quiescent and bonds will be supported by positive carry. Initial moves by Trump to slash gov’t will cause a bit of economic pain in the near term, but will be positive in the future, and will help keep inflation down.
