Curve Advisor Bulletin
Getting back to the Dec 15 deadline, we can have one of three outcomes by Dec 15:
1) Ag Deal. There is a tiny chance that we could get something more substantial than an Ag Deal by Dec 15, but I think the odds of this are negligible. Fixed income will sell off. I think in the near-term (next 18 months or so), net eases will be priced. It’s not clear to what extent some hikes (or reflation) will be priced further out the curve (as the flies around EDH2 have started to do). I’m not sure reds will sell off more than 15bps or so. I would love cheap upside tail plays if we did sell off this much (or more) – especially for after the elections.
2) No Deal but tariffs get pushed back. This is probably the baseline expectation. I’m not sure we get much of a move. Maybe we rally some, depending on the narrative.
3) No Deal and tariffs go into effect. I think this would only be worth 0.5-1 more ease, but it really depends on what equities do.

But first I want to see how we trade net week around the FOMC meeting. I wouldn’t think the Fed would make any changes (to the statement, IOER, dots, etc), but you never know.
I had been thinking about: (1) strong auto sales, (2) high subprime auto loan defaults, (3) high payrolls. Part of the latter could be incorrect birth/death adjustments (that get corrected annually, as we saw last spring). It’s not clear to me to what extent the gig economy is skewing the data. I took a lot of Ubers during my week away, and it seems like the BLS would be counting that job twice. Maybe people buy cars as an Uber business and go into default when they don’t make as much money as anticipated? It does look like Uber has increased the number of drivers by almost 100K/yr. So you add some from Lyft, Grubhub, and the hundreds of other gig economy jobs, and maybe that number is not so small (especially if you count double-dipping). Maybe.
It seems to me that we have TWO potential minor regime changes in the next 11 months:
1) The China “Phase 1 Trade Deal.”
2) The 2020 Elections.
The timing of the above is mostly clear. While it’s possible the Phase 1 deal could drag on, we should get a stronger indication by the Dec 15 deadline. The elections are on Nov 3. So on both of the above events, we could get a drastic change in tone and a minor regime change, if we get a “tail” event.

I had thought that the economy potentially rolling over despite an Ag deal was a bullish “out” (poker expression for a way to win even if something unfavorable happens). With the strong payroll and strong holiday sales, I’m starting to question that theory. I think we do have bullish outs from: (1) frontloading of activity ahead of tariffs, and (2) Trump going after the EU and the rest of the world even after a China Phase 1 deal (don’t be surprised if some of the other Asian countries are added).
My thoughts for today:
• Well, that was a huge beat on most jobs categories! The big surprise for me was the 60K increase in Health Care and Social Assistance jobs. I’m wondering if this is structural and will keep going higher (as a trend) as more elderly care workers are needed with the aging demographic.
• It is somewhat curious that we are only down 4.5bps. But there was nothing in the report that would indicate a hike. Wages were contained, and U Mich inflation expectations are lower. There are 26.5bps of ease priced into next year, but it’s going to be tough to take a noticeable chunk of that out with: (1) no Fed hikes thought possible for next year, and (2) the Dec 15 trade deadline. I think we could take some of next year’s eases out if the Dec 15 tariffs get pushed back. But Trump is fickle and he has his tariff sights on other countries in the world, so it’s hard to take out all eases.
• I’m thinking something catastrophic would have to happen for the Fed to ease in Jan. We only get one more payroll. While we do have the trade deal, I’m not even sure if “no trade deal” would be enough to get an ease.
My favorite bullish gamma signal trades (for a large move in rates):
• Sell EDZ9 98.125 straddle vs buy EDF0 98.375 call (for a 1-1.5bp credit)
• Buy 2EF1 98.625-.75-.875 call tree (traded 1), but you need some other crisis protection (trade above, conditional steepener, etc).

My favorite bearish gamma signal trade
• I think some kind of put structure (put fly, put 1x2, etc) that plays for EDH0 through EDU0 at the 98.25 strike make sense. Unfortunately, the markets have been hammering those strikes for weeks now.

If you have a bullish or bearish bias, you can consider selling or buying a fly or double fly trade (respectively).
Looks like we could get some excitement… my contact is getting his gamma signal for a 20+bp move in ED5 in the next 2-3 weeks. I think if we get a move to the downside, it could be less (since it’s hard for the Fed to hike). I suppose it’s not hard to imagine a large move, with payrolls, the Fed meeting, China trade, other trade, and now Trump impeachment. He is suggesting to buy the 2EF0 98.50 straddle (traded 17).
Things I find interesting today:
• Considering how negative the trade tone was yesterday, I’m shocked that equities are less than 2% off the highs. I’m wondering if the sum of: (1) corporate buybacks, (2) automatic 401(k) contributions, (3) widespread availability of apps like Robin Hood bringing investing to the masses, and (4) hedge funds that need to surpass the benchmarks are just causing a continual equity bid that is “difficult” to overcome. How do you overcome the above, if they have critical mass? It could be painful if we get a correction, but that is some stream you have to swim against.
• Yesterday, the Chinese suggested using the Japanese trade deal as a template. This would just be an ag deal, a tariff cease-fire presumably with no rollback, and Xi does not have to be present to sign. That seems like something that is simple and win-win, as lame as it is (even lamer than what I had envisioned as a “lame Ag Deal”). This way, the US can focus on Brazil, Mexico, France and the class of kindergarteners that are more in our negotiation league.
• Retail Sales so far since Black Friday has been great. But I’m wondering if the consumer scrambling for deals is necessarily a sign of strength. There could be the confluence of: companies front-loading inventories ahead of tariffs plus a softer consumer looking for deals. #marathon
• EDZ9 OI has declined 76K in the past 5 days. EDZ9 has seemed slightly bid relatively (especially in US hours), so this appears to be an unwind of a Libor widening play. Libor-OIS has been narrowing (near two month lows), so it’s unclear if the Fed adding liquidity has settled down the year-end markets, or if this is just a pause.
“>50%” of an Ag deal still leaves a lot of room for a catastrophic event. In case you missed the rally, here are some bullish trades I like that got left behind:
• Sell EDU0 6mo double fly @ -2 (currently trading). You would expect the front flies to get much lower as eases are priced in.
• Sell FFK0 3mo fly vs buy 25% EDH0 6mo fly @ 8.5 or higher. I am a broken record. If this keeps up, Q2 looks like the prime ease candidate – even with a patient Fed. We probably need another noticeable leg higher for this trade to kick in.
• Sell EDZ9 98.125 straddle vs buy EDF0 98.375 call, taking in 1bp. The Fed is not doing anything at the next meeting and Libor-FF has been stable to narrowing. This could be noisy, and EDZ9 settles in 1.8 weeks. You are more likely to lose money on a selloff, but Libor-FF coming in could bail you out on a selloff. You would have to think an ease is possible in March.
• Sell EDU1 6mo fly (or EDH2 12 mo fly). These may be reluctant to move as EDH1 6mo fly was unusually high 6 months ago for several months. However, if no there is trade deal and the economy falters, these will be a few bps lower eventually. These can only go noticeably higher if the Fed hikes (LOL) or we get reflation. Neither of those cases are likely.
We got the first shoe to drop on the trade talks:
• Apparently, Trump got tired of the Chinese not giving him anything. I’m wondering if his Godfather approach to tariffs (Argentina, Brazil, France, EU, etc) is him trying to flex his muscle, and to remove the narrative that Trump doesn’t want to impose the Dec 15 tariffs. He should know that those tariffs will have no effect on holiday sales, as most of the holiday merchandise should be here before the tariffs take effect. I think there is a > 50% chance the Chinese will let the Dec 15 deadline pass. So far equities have only dropped 2%. It could be interesting to see what happens IF it gets to down double digits.
• I still think it is >50% that the Ag Deal gets done eventually (before the election). It would be colossally stupid for two sides that can BOTH benefit (they need Ag, we need to sell Ag) to not get something done. It all depends on how much the Chinese cling to a rollback of previous tariffs and how much we cling to trying to get IP, subsidies, etc in the Ag Deal. Those latter things don’t have to be enforceable, so that’s why I think something eventually gets done.
There seems to be a lot of straddle selling or buying structures like the +50K EDM0 98.375-.25-.125 put fly @3.5 around strikes equating to no further moves (or limited moves). We do have almost 28bps of ease priced in for next year, which at this point is just more “tail” risk being priced in an environment where a Fed hike is not apparent in the near-term. I don’t hate these trades, as the mode outcome is probably for a no move in the next 3-11 months. It is an interesting “no move” hedge if you have a lot of ease trades. I’m just not excited about paying 3.5 when it’s possible the wheels come off the wagon on equities in the next few months.

One minor consideration is that the core PCE inflation for Jan through March 2019 were 0.04, 0.04, and 0.06 respectively. So we should get a small uptick in yoy core PCE inflation in late Feb through late Apr 2020 when the low mom core CPI prints roll off. I think the Fed will be well aware of this effect, and will not be much of a consideration in determining policy. However, the market narrative spinners could try to fabricate a story if nothing else is going on. This may be one of the reasons that the EDM0 83-82-81 put fly has been trading for good size.
Here are the things I thought were interesting from last week:
• I was shocked that GDPNow for Q4 surged to 1.7%. This obviously strengthens the case for the Fed being on hold. However, the biggest forward-looking indicators, the trade talks and equity levels can change at any time.
• I keep feeling like there’s a risk the consumer could start rolling over (mostly because of record auto loan delinquencies). We did have a strong start to holiday sales. But it’s a marathon, not a sprint and this year the holiday shopping season is shorter.
• Biden somehow jumped into the Democratic betting lead, with PB and Warren not too far behind. I would have thought Bloomberg running would have taken some of the moderates’ votes. But again, this can change with one stupid comment.
• I don’t know the Chinese care that much about the Hong Kong Bill. Congress was going to override any veto, so they certainly can’t blame Trump for signing the bill. But I would expect the Chinese to raise a big stink about it to get some concessions. For example…
• China is “requesting” a rollback for a Phase 1 deal. On the margin, this probably decreases the likelihood of something getting done and/or anything getting done quickly. That having been said, any deal that gets done with a rollback could have more “meat” on it (but still not any meaningful meat that is enforceable). It’s hard to say whether the Chinese really want a rollback, or if this is again posturing.
But we still wait on trade deal details. I’m really curious how this ends up. I’m not convinced an Ag purchase order means anything to the economy (unless you are a farmer, or other entity directly affected). We get some important data this week. Let’s see if we get any notable changes.
There are a few wacky things going on in the markets:
• FFF0 is trading below FFX9. This is not a hike, but rather some year-end FFER issues being priced. However, since we are short FFF0, I like unwinding all FFF0 at 98.44. This way we got the EDF0 83 calls for “free”.
• My favorite curve trade is to buy EDH1 6mo double fly @ -5 or -5.5 (currently -5.5/-5) if you need a bearish trade. If you need a bullish trade, you can sell EDU0 6mo double fly @ -2 or -2.5 (currently -2.5/-2) or sell EDU1 6mo double fly @ +0.5 or 0 (currently 0/+0.5). You can even do the trades as a bull-bear combo. We had seen this TWICE earlier in the year, where EDH1 6mo fly was elevated (and subsequently collapsed). I suspect this could be from hikes being priced in. But if hikes are going to be priced in, EDH1 6mo fly would be higher, and EDH1 6mo double fly would be positive – there are only one of two hikes to take back, so they are more likely to be sooner!
• EDU2 12mo fly is close to -1 while EDZ2 12mo fly is close to -3. I still like the value of owning the EDZ2 12mo fly. You can consider selling some EDU2 12mo fly against it for a flip, as I would expect the difference between the two flies to get to 1 at some point
• On a related note, I like EDZ2-Z3 steepeners (currently 6/6.5) as a reflation trade. I’m not sure how much juice it has, but it should be good for a flip at some point. The current curve flattening appears to be positioning ahead of this “Deal” – that on a good deal, the front hikes will get priced out, but the environment will still be weak. We could see steepeners come back after the announcement, as we approach year-end.
We sit here waiting for that momentous purchase order. My general impression is that it will get done – I mean it’s just a purchase order for something China wants to buy and the US wants to sell. However, the US needs to stuff enough things that sound great to put around the purchase so that it doesn’t look like it’s just a purchase order. That’s why Trump says laughable things like how this purchase order is going to 60% of the Grand Deal. He has to say that, because he needs to sell 10% of the Grand Deal (which is what we are going to get), as if it was >50%. You can tell who has the upper hand in the negotiations whenever you see one side constantly talking about how close a deal is, and the other side mostly says they are dubious. So that’s why this is dragging on - the Chinese aren’t giving us squat. At some point, they will probably throw us a bone on IP, etc (as long as it’s not really enforceable).

The question is, how will the markets react? My impression is that we are keying off of how much of the earlier tariffs get rolled back. The number of enforcement holes are going to take much longer to figure out. The baseline is probably for the Dec tariffs to get eliminated. Anything worse (like the Dec tariffs getting pushed back, or no trade deal) will be worse and any rollback of previous tariffs will be better. There are a few reasons I lean bullish:
1) I don’t think this deal will be “material” enough to change anything for business investment. The reason is that the talks will be ongoing, Trump is volatile (and could reimpose tariffs), and we probably will get a change in leadership in the next elections (and any deal could get reworked anyway).
2) There’s a tiny chance nothing gets done on trade.
3) I think there was some front-loading of activity. Most people think that after the trade deal, we will get a massive amount of economic activity. This is possible. However, it is also possible, that we had a lot of activity ahead of the tariffs, and that we may need to work that activity off.
4) We could get a “sell the news” effect in equities. We had a massive run-up, and it would not surprise me if we after the initial short squeeze, we get a lot of profit-taking. Things always look different after a 5% equity move.
I’m a little surprised that EDZ9-FF is pricing in less than a bp more widening in Libor-FF by the middle of next week. I had suggested selling EDH0-U0 vs buying FFJ0-V0, which has moved the wrong way. I still like that, but a better trade is to sell EDH0-M0 vs buy FFJ0-N0 @ -1. The reason is that EDs could flatten if Libor-FF blows out for year-end (not currently priced), and it could also work if EDH0-FF does not narrow as quickly as the markets expect. The structure gets you short for the April meeting vs the July meeting. If you want to be long for the April vs July meetings, you can sell EDH0-M0 vs buy FFK0-Q0.
Things of note today:
• We sit around trying to weigh the various China news headlines. It will probably be like this for the next few weeks (at least), as you would expect in the final stages of negotiation. The most noteworthy headline was the US saying they may postpone Dec 15 tariffs even if there is no deal. LOL. Trump sidestepped that landmine. So when Trump says that he is going to jack up tariffs if a deal doesn’t get done, we can all see his bluff with 72o though his mirrored sun glasses. How are you jacking up tariffs when you can’t even stick to your own deadline on a previously announced tariff?!? AND you may exempt a large cause of the trade imbalance (Apple stuff) from tariffs! The US is getting squat from the Chinese on any "deal." But just any “deal” may be enough for the markets. Maybe.
• I think the bigger factor is going to be the elections. Buttigieg got the notice of Gundlach last night. PB is supposed to be a more centrist candidate. So I looked him up. He is not as bad as Warren, but he still believes in: (1) raising minimum wage to $15, broad paid family and medical leave plans and the typical Dem social spending, (2) reverse the 2017 corporate tax cut!, and (3) raise the top individual tax rate to 49.9%. I suppose that’s more tolerable, other than raising corporate taxes (which would make US companies less competitive and relocate (again)). Warren is still the betting favorite (25%) to be the Democratic nominee, but PB’s 18% and Biden’s 23%(!) could make things interesting.
I’ll be out of the office next week, but I will probably send out market commentary on a few days, if anything interesting occurs.
In terms of trades,
• We are now pricing in 32.8bps of ease next year. I suggested the 30s was about “fair.” Tens are at 1.75, which is the upper end of the Fed target. So I am inclined to take profit on some bullish futures trades (any FFG0-G1, EDZ9-Z0, some FF fly vs ED fly). I still like holding on to the bearish FF vs EDF0 calls, as I tend to think the news could get worse before they get better (if they get better). I think the risk on the data in the next week could be to the downside.
• We get the FOMC minutes today. One interesting trade is to sell FFG0 (and work bid in FFX9 bid side for FFER protection) and buy the EDG0 98.375 call @ a package price of 98.445 (or 98.4425). This structure effectively gets you bearish for the Dec and Jan meetings (Fed on hold). The breakeven on the EDG0 calls on an ease in the next two meetings is about 12bps on the March and May meetings. But if the Fed is easing in the next two meetings, I think there will be more than 12bps priced into the March and May meetings. Otherwise, if the Fed skips, you get the call for “free” (assuming constant EDH0-FF). The calls settle after the early Democratic primaries. But the reason to do this trade is in case the Fed mentions an IOER move (for the next two meetings), in which case, the FF could sell off a few bps.
Things I am thinking about today:
• FFER continues to print 1.55. The quartiles today (25% and 75%) were 1.55 to 1.57, so I suppose we could get a high print. But we would have to print over 1.56 the rest of the month to be at the current market pricing.
• The markets seem to think Hong Kong could be an impediment to a deal. The actual bill has no teeth. It’s mostly a question of optics. It’s hard to gauge the importance of optics to someone running for re-election, and a country where saving face is important.
There seems to have been a lot of vol selling the past few days around strikes that correspond to the “no move” scenario. There was a Bloomberg article yesterday saying an Asian trader seemed to be building a long put vs short call position. So whites have been reluctant to rally. This makes some sense, in that the Fed appears to be on hold in the near-term. I was looking at EDH0 81-2-3 put fly or 1x2 but didn’t pull the trigger on a recommendation. I don’t know that this is the time to be picking up pennies. I’d rather wait for a better risk/reward opportunity as those positions seem a little crowded now.
Things I found interesting today:
• Williams said “we’re very focused on end-of-year in money markets.” I think the Fed is just going to whip out the heavy artillery in December. I think year-end overnight repo will go out in a whimper.
• Yep… Trump just whipped out the threat of higher tariffs. They obviously aren’t making much progress. The Chinese must feel like they are playing with a dumb animal at the zoo. All they need to do is to tap the glass a few more times, so that he repeats it a few times and can’t take it back. Then let the Dec 15 deadline pass, and see how Trump likes an equity correction. Melly Clistmus!
• Just to give Trump a little credit, I think the Trump-Powell meeting yesterday was to confirm that if he blew up trade talks, he wanted to see to what degree Powell would step in. Or maybe it was to set up a fall guy. The meeting was “cordial” because if the US economy goes into the tank, Powell probably indicated he would need to reduce rates.
• I’m a little unsure of how the Hong Kong bill could affect the trade talks. That whole situation is sad, confusing and IMO misguided. I’m not sure how crapping in your living room is going to help your dispute with your neighbor. I don’t know if the neighbor even cares… at some point you can’t get to work, you may not have access to food, you have a cesspool in your house, and the neighbor just comes in to take over the house when it gets foreclosed. #thelonggame I’m not sure what the international community can do about it.
There has been increasing chatter that there could be an IOER move, since the FFER is only 5 bps from the lower end of the target. I previously mentioned that I was dubious the Fed would do anything in December, because there will be year-end funding pressures. I am not sure the Fed will want to change off of 1.55, but I suppose *IF* they were to make a change, the Jan meeting would be a reasonable candidate (so it’s possible FFF0-G0 could go positive). And by the March meeting, if they hadn’t made a change, I’m not sure they would make an IOER change ahead of quarter end and Japan year-end. The Fed minutes this week could be interesting in that any potential near-term IOER move would have been discussed at the last meeting.
FFX9 is now 98.445. Since 1.55 the rest of the month would get us to 98.447, it is probably a good time to start taking most off on the offer side. The fixings could get more erratic as we get to year-end, and we can already see the year-end turn being priced much higher in the repo market.
I thought the trade talk headlines this weekend were somewhat subdued for this White House (“constructive”). Today, with the “mood in Beijing about a trade deal is pessimistic” headline, the negotiation gaming is underway! We saw Liu he “pretend” to walk away before. So the ball is the US court. Not sure to what extent the US is going to reel them back in, and whether it will be good cop (concessions) or bad cop (more tariffs). Because the Chinese play chess, I’m actually wondering if the Chinese are baiting Trump to claim “come back or more tariffs” and crush the stock market, which would give the Chinese more leverage. It should be an interesting four weeks until the Dec 15 deadline.
As we wait for this momentous purchase order:
• Growth seems a little lack-luster. I was a little surprised that GDPNow is calling for 0.3 in Q4 and Nowcast is calling for 0.4. It’s not unheard of to get GDP wrong by a few tenths, so it’s not crazy to think we could get a negative print in two weeks. In particular, we’ve averaged 0 for Retail Sales ex autos/gas for the past two months. We are probably one more month of bad data away from hearing the “consumer is rolling over” narrative.
• I think there is a high probability we will get “we made (good) progress on trade talks” today. Even if they made no progress, that’s what they would say. And it’s probably a little early to say they agreed to all details, since they probably want to include a few things other than “the Chinese buy Ag for no Dec 15 tariffs.”
• Equities are on fire! I’m undecided if we get a blow-off top when the purchase order is signed, or if we just keep going.
In any event, since we are in wait-and-see mode, let’s just see if we get a tail event on the trade talks before looking for value. We have no competitive advantage in trying to guess today’s outcome.
Yep… markets sold off too much. Here are my thoughts today:
• Fixed income is clearly bid. All the bulls who stepped away waiting for 2% tens apparently are scrambling back in with no inflation and a worsening global outlook. I too expect ISMs to pop after any Ag purchase order. But as Williams said just today, “Even with Trade Resolution, Uncertainty May Stay.” Yes. There will be uncertainty until we know a Socialist won’t be President. Political Uncertainty > Trade Uncertainty (see the UK).
• All these exporting countries taking it on the chin from the Trade Wars just shows me that the US (THE importer) has been subsidizing everyone else’s growth for decades, at our expense. The pinhead economists in ivory towers are going to say it’s win-win. Maybe – but citizens aren’t fungible. Why is it okay to support local business (instead of Walmart or Amazon), but I can’t take care of my fellow countrymen? Even with an Ag purchase order, trade balances are not going to be the same again. Those exporting countries could be hurting for a while.
• FFF0-FFF1 is now -28.3. I’m thinking fair value right now is somewhere in the -30s, pending Retail Sales. BUT… my source may be getting another gamma signal (20bp move in the next two weeks). I’m somewhat dubious since his gamma signal is only expecting a 20bp “high to low” move (rather than “start to end” move) in two weeks. I suppose anything can happen if we get a shocking Retail Sales (in either direction) tomorrow. I reached out to my old gamma signal source, and he says he hasn’t gotten one in US the past month. He did get one in Bunds earlier in the month. Doh!
• The FFER prints 1.55 AGAIN! Not sure why you would bet on the Fed not being able to keep rates under control – especially in November (FFX9)! Maybe December - but I would expect they would increase the size of the repo facility as we got to year-end.
• Speak of the FFER, Bloomberg had an article where they suggested the Fed may make an IOER move the other way (raise IOER), since the FFER is closer to the bottom of the target range. I don’t think this will happen at the Dec meeting going into year-end. I suppose this is possible early next year. Maybe. It just seems like there is more of a problem with higher rates than lower rates. Why would the Fed pay more interest, when they don’t have to? The Fed set the IOER at 1.55 and the FFER is 1.55. I call that “mission accomplished.” Just in case, be alert for the Q1 meeting pricings in FFs.
Market developments I thought were interesting:
• FFER printed 1.55 (again) and FFX9 refuses to go more bid. I just don’t see the rest of the month averaging 1.568. It could happen. But even if you knew something, I’m not sure why you wouldn’t let it go to 98.45 and just sell the snot out of it around there.
• FFF0-F1 spread (aka eases in 2020) got to -24bps. I had suggested selling FFG0-G1 (currently -20.2) or EDH1-H2 (currently -17.5). I think we are close enough to one ease being priced next year to take some profit, but as you may have guessed from my Market post, I think it can go more.
Things I thought were interesting today:
• Powell said the risk of lower inflation is greater than the risk of higher inflation. This was a little surprising considering he thinks the economy is awesome. In any event, Powell remains dovish and the Fed is not hiking any time soon – especially not after today’s CPI.
• There have been a few negative trade headlines recently. Regardless of whether or not you expect the Ag purchase order (aka “Trade Deal”, phase 1) to get done, you would expect some negative headlines as we approach the end. They are trying to wrangle what concession they can. There is a high probability this could go on in the near-term. It’s not even clear if the Chinese don’t want to go past Dec 15, to see if equities will tank when the new tariffs get implemented. That seems like a “free” option to me to soften Trump up – they can always agree to a deal and roll the tariffs back before the boats arrive in the US. I’m not saying this will happen, but we know Liu was willing to walk away from the market once before – I don’t see why he couldn’t do it again. I just don’t know how desperate Trump is so there’s a small chance we could get positive news at any time. Yes. I said how desperate TRUMP is. The Chinese have us by the b!@#s. The elections are coming, the Chinese have all the time in world, and Trump needs to protect the stock market (if he can).
• Trump tweeted that he boosted US incomes by $7,000. Huh? Was GDP like 5% the past three years and I missed it somehow? In any event this just goes to show you that when/if Trump gets his Ag purchase order, he’s going to parade that around like he just negotiated the Louisiana Purchase. He should enjoy it because he is NEVER getting a real enforceable trade deal before the next election. He could get another Ag (or oil) purchase order, but he is not getting anything meaningful.
Speaking of hikes, tens are now yielding 1.93 (above the FF target range) and bonds are yielding 2.40 (almost the Fed’s longer run rate). I can just see my former Russian colleague drooling at the thought of buying the longer end of the US on dips. I realize that the term premium has been coming back and inflation break-evens are recovering, despite the $11.6T of negative yielding debt. Since I look at relative value, any time the longer run rate is above the current rate, you have to give some thought to a potential hiking path. Hikes are all about the inflation - how much inflation the Fed is willing to take and when (if ever) we get it. We get CPI tomorrow. A shocker is always possible, but I think the market is probably thinking the risk is more to the downside.

The main potential catalysts for a hiking cycle are:
• A real trade deal before the elections. This “Phase I Deal” is basically just a purchase order and a bunch of empty promises. While I think the Chinese know Trump is not a reliable partner with whom to make a deal, I guess it’s possible the Donald has an ace up his sleeve. Maybe.
• If Trump or some non-socialist won the next election, we could get a rate surge, on the back of an equity surge. Maybe.
• We could get inflation, but a lot of people have gone broke betting on this - just ask the Japanese traders.
While I may not believe in near-term hikes, I do think reflation (term premium, etc) is possible.
I still like the idea of owning EDF0 98.375 calls. Another variation you can do is to sell EDZ9 98.125 calls against it, and pay 0.25-0.5bps. You would have to have a strong Libor view (in particular that it won't narrow). Libor-FF has been fairly stable for the past month, and you would need that to be the case for the next month.
… The only way the FF 3mo flies lose a noticeable amount of money is if the markets price in near-term hikes. I just don’t see that being likely, or even “possible.” The reason is that the Fed spent all this time talking about how their inflation target is symmetric around 2%, and that they would be just as comfortable if we were a handful of tenths above as below. I also think the low inflation is structural and if we couldn’t get any inflation WITH tariffs, I fail to see how we will get inflation with lower tariffs. But just in case, that is why I liked being long up to 25% as many 6mo flies a little behind. Because if the markets are going to price in hikes, it is more likely the hikes come later than sooner.
I was looking at the political odds, and Trump is 42% to win the 2020 election (there are many candidates – both Democrat and Republican). Warren has a large lead at 15/8 (35%) to win the Democratic nomination (Biden is second at 21%). She appears to be an admirable woman, but her policies are going to end up crushing the stock market (which I am not saying is wrong or right). Here is a list of her beliefs:
• She is very pro-environment (ban fracking which could crush US oil production, reduce carbon emissions, reinstitute the Clean Water rule)
• She is pro-regulation (raise federal minimum wage to $15, wants to bring back Glass-Steagall, support broad family and medical leave plans, break up agribusinesses, drug price negotiation, allow US government to make generics, slash the defense budget)
• She is pro-taxes (raise taxes on wealthy to fund new social programs, increase capital gains taxes which would reduce attractiveness of investments, raise corporate taxes, impose higher taxes on financial institutions)
• Oh, and she wants to limit stock buybacks (that some consider one of the main reasons for the equity rally).
I fail to see how the above doesn’t crush corporate profitability, cause an exodus of some wealthy from the US, and result in a 25+% collapse of the stock market.

A week or two ago, Bloomberg had an article (which was drivel) that claimed that the markets were similarly leery of Trump being President. As I pointed out at the time, Trump was only going to do things that HELPED the stock market(!), which was proven right. Warren is NOT going to be good for the equity markets.

Warren is about 18% to be our next President. To me, that means the expected value to the stock market should be a 4.5+% drop. Now, I’m not sure if the markets are thinking the same, and that we would be 4.5% higher if Warren dropped out. But I really think the markets are underestimating the impact of the above policies.

I think once the Democratic primaries start in February, and we get to the super primaries in early Mach, if Warren’s odds of being President shoot higher, that is when the nervousness could start. This is why those FF flies make sense to me…