Monthly Archives: March 2018

March 28

Well well, after months of uninterrupted rise; 12 month money retreated a smidge on Wed.

We still see the equilibrium rate of funding at 2% and given other stimulus, the economy and pricing remain strong. We do not buy recent retail softness given the extreme weather patterns of late Winter. Trump's Fox News cabinet and 1920's trade ideas will not be the undoing of the post- FC expansion.

Hyper-moves and demon drop equity flushes may brown stain a junior casino capitalism millennial but those moves are more a function of waves in the zero rate surface breach than economic trouble. Year 2 for any POTUS, let alone one as totally incompetent as this one, is usually a choppier one. The measure of the quickly buzzed about Powell Fed will be the new Chair's understanding of the 3 year old in charge, his creepy Treas Sec and on the wagon Economics adviser. "Measured" isn't a strong enough term for being the independent counter-weight to Larry, Curly and Moe.


Above are a couple of good primers on the impending roll out of SOFR. Stringing out 3 month SOFR futures in deep and resilient packages will be an important step in the rate's rapid jump from infancy to benchmark.

As this roll out has approached, a steady march upward has occurred in the soon to be tar-pitted rate sets that bench-marked money rates for the last 35 years. Much ink has been spilled of late to explain the relentless rise ex-post. Even Seeking Alpha, on Mar 13, posted on the now nearly 6 month rise with a chart. The "deep dive" amounted to "I'm no technician, but this looks like a breakout !" Sad trombone. We have been yakking about this rate adjustment (and cheering on its arrival) since Q4 2017. Now, looking forward to the April SOFR roll out and the May futures contract, these wider and higher sets offer a cushion to the largest switch from an existing rate base to a new anchor in monetary history.

Even with the long lead time for participant adjustment, billions of dollar (and yen and euro) products could find themselves adrift after the disappearance of their underlying. Nearly 2 million Eurodollar contracts traded from Dec 2018 to Dec 2020 last Friday alone. Over $10 T notional amounts remain in open interest covering the same term. This is a BIG universe and its getting a new Sun.

Of course, nothing will go bump or bang, let alone crash. Of course not. Just like raising the funding rate and shrinking multi-trillion dollar balance sheets, everything will go smoothly and just as planned (hoped). Considering the underestimation of most as to the already significant rise in term structure sets, we feel the potential depth and liquidity needs of the soon to be hatched market will be too shallow for efficient operations. An unexpected need for actual dollar funding in the first 6 months (minimum) of SOFR bench marking could become dicey. The predicted non-event re-Sunning of the financial universe will need a narrowing of current relationships to confirm.


Today's Un-enjoyment figures posted under an old rule of thumb I used to promulgate back in the dark ages on CNBC. Simply stated, The most accurate employment data set occurs when an outside "miss" (up or down) carries 2 month's revisions in the SAME direction of the print. Such as the case today.

The labor pool is showing some elasticity but I can certainly attest to the dearth of skilled labor here in CA. The wage component is annualizing around the 5 year T rate.(see below - but GDP prints of 5 are possible in our calculations) Businesses have moved quickly to support the fiscal stimulus the Administration has tossed on the already vibrant up cycle.

My post-mortem  of the release is a reminder that our market based neutral model had been leaning in this direction since early Q4 2017. Presently, with a 12 month money set of 2.53, (le cinco es 2.66 !) and the other strong stim, our calibrated neutral rate for FF in the policy corridor is around 2% and .75bps from the lower floor. Policy today is dialed up near 11 a full eight years into the economic advance as  Old World and New Frontier economies brighten.

We will be shifting our focus to the potential "whip-snap" effect in the term structure as J.C. Lately and the Powell Fed Flap-jawers have finally bought into what Mr. Money Market has been screaming for months. The unintended consequences and unknown unknowns of Op Twist and moving rates before balance sheets could take shape as Q2 bleeds into 3. (this has always been our gripe with bandwidth filled with equity pundits hyperventilating over today's price action - money is a good 6 months ahead of them) Eurodollars for the end of 2019, and those of the Green persuasion will have our attention into and well out of St Patrick's Day.