Payroll Week Trade View (May 2, 2016).

I’m still baffled that EDM-U is 69% higher than any of the 3mo spreads in 2017.  SIXTY NINE percent!  And at Friday’s settle, M-U was 75% higher than H-M.  I basically think it’s a “pick ‘em” between M-U and H-M.  Actually, if you put a gun to my head, at 1:1, I slightly prefer H-M at 1:1.  You should NOT have a 75% premium when it could take a number of months to show growth.  I know that in the past two years Q2 GDP rebounded sharply (4.6% in 2104 and 3.9% in 2015), but this year feels different.  The data has basically been one disappointment after another the past month or so, and this is corroborated by both GDPNow and Nowcast.  It’s not clear to me that we have enough time before the July (or even the September) meeting for a hike to be substantially priced in.  But as previously mentioned, on an absolute basis, those Q3 meetings are not “wrong” – it’s just that on a relative basis, it is high.

Unless someone knows something about payrolls next week, the CA Trade List is going to do really well.  I am trying my best not to pile-in though… so far we have:

  • Short M-U spread outright (vs long 1.5x H-M).
  • Being short the EDU 92 straddle structures (in two ways). Plus, you can do some tail hedges.  These aren’t the best expiry trades, but it we could just sit between 0 and 1 hikes thru Q3 for a while.
  • Being long rolldown in EDU6-U7 via calls.

The urge to look for other good risk/reward trades next week around this theme is great… but maybe if we are still here after payrolls I will look for more rolldown.  The conspiracy theorist in me is wondering if some of the larger punters are short EDU6 because of a strong hike conviction.  Rather than cover after this week’s dovish events (dovish FOMC, softer inflation and growth) they decided “if the Fed doesn’t hike again in Q3, they are never hiking,” so they converted to a flattener.  If they ever stopped out, this could be amazing for our positioning.  But this is just rampant speculation/hope, based on no facts (I see no evidence in the OI).  And on that note, I think it’s time for me to stop talking my book for the week.

[This is an excerpt from the May 2, 2016 issue]