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Eurodollar Futures Curve Update (spoiler: still inverted)

I guess I took my own advice a little too literally. I did write that when the eurodollar futures curve first inverted, it was going to be dull. Didn’t start out that way, of course, with a small bit of theatrics right during that front week in December..

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I guess I took my own advice a little too literally. I did write that when the eurodollar futures curve first inverted, it was going to be dull. Didn’t start out that way, of course, with a small bit of theatrics right during that front week in December when the inversion first showed up. Ever since then, it has stuck to what I had said on Day 2 about what you should expect, or not to:

For the time being, our focus for now remains on the twisting. And we shouldn’t expect much more out of it. At least, for now.

Though this was truly a Big One, a serious signal right up in the top tier of monetary and financial warning signs, it still goes on the backburner in this first stage. I hadn’t realized, however, that while I’ve kept it in the corner of me eye for myself, I haven’t updated it here in over a month.

Sorry about that (since more than a few have asked, and prices on these things can be somewhat difficult to find, I’ll leave a couple links at the bottom where everyone can go so that you don’t have to depend on me for them).

So, where are we with the curve? Pretty much in the same shape, if a different level of nominal prices. When it comes to the twisting, it’s been just as I wrote up top and initially; we didn’t expect a whole lot and not a whole lot happened.



This doesn’t mean nothing has happened to the curve. On the contrary, it went a tiny bit un-inverted yet still kinked/flat through the latter half of December, varying somewhat in its flat-ness over those weeks.

Perhaps most important of all, the curve’s changes you see above during the first two weeks of January fully corroborate everything I’ve written recently about the rest of the “bond market”, Treasury curve, in particular, about how to interpret this BOND ROUT!!!!

It’s all about the Fed rather than improving growth even inflation prospects.

The market here, like the front end of the Treasury curve, is being pushed up because Jay Powell’s hawks have surmounted any remaining omicron doubts. It’s clear sailing into rate hikes; at least the first few of them. Thus, the eurodollar curve has in its entirety moved up (shown above).

If this was improving economic potential or inflation, then the flatness would have gone away at the same time the curve pushed upward nominally. Instead, just like the Treasury curve, those rate hikes are colliding with the same Taper Rejection skepticism and therefore, this week, the kink in the eurodollar curve went back fully inverted again!

It’s not much, just half a bip in the same contract space around the December 2024’s, yet, the important part is as I wrote from the very beginning:

While this is a major milestone in the monetary system’s decidedly anti-inflation/growth journey, it is hardly the end point of it. On the contrary, though it takes a lot of negative, deflationary potential to distort the curve in this way, we need to see if the market sticks with that potential rather than just some flashing rush of otherwise fleeting concern.

Some modest twists and turns during the last month, and the same curve skepticism first raised back when everyone thought omicron was the big worry remain even though omicron today is an almost totally faded influence.

The kink/inversion has indeed stuck; as I had pointed out from Day 1, this isn’t about the pandemic.

Growth scare and Taper Rejection.

The FOMC says consumers are normalizing to high CPI rates and the unemployment rate pictures a very tight labor market bringing with wage therefore inflation potential. These justify, in the official view, tapering and rate hikes which the market fully agrees the FOMC will get to carry out. No COVID to stop Jay’s minions.

Given this, despite this, he undefeated bond market then totally disagrees with the pure assumptions, the macro astrology being employed to drive those Fed changes. For one, there is no evidence “expectations” play any role in what is always a monetary phenomenon – and traders in Treasuries like eurodollar futures are the actual money, so they’d know – and despite the contention the labor market is tight we’ve seen a faulty unemployment rate mislead Jay Powell already and not very long ago.

It’s the height of predictability on all counts. 

On top of those doubts, there’s others starting with growing deflationary potential inside the monetary system (TIC, collateral, BIS, etc.) raising the probability something goes wrong with it and spoils whatever growth potential actually exists. Then there’s China in the real economy along with the rest of the global system which did not at any point look like the US goods economy.

And now a whole bunch of data showing, yes, transitory “inflation” and the very real potential for a slowdown maybe downturn or worse.

The small eurodollar inversion doesn’t tell us when or what, certainly not at this stage. What the kinked curve does indicate is simply how these negative potentials I just listed are very real, very serious, and are too probable to become a big problem at some point in the not-too-distant future (as I warned before, you don’t take the eurodollar curve literally) that it requires drastic measures like those it takes to upset and so distort this thing.




So long as the inversion or just the kink in the curve is limited to the small depths we’ve seen since it first began back in late October (when the flattening first become obvious), there’s nothing imminent to worry about; it’s all just non-specific downside probabilities. The current problem is how they are far greater than anyone in the mainstream, at the Fed, or shouting about inflation would admit.

The next thing we will be watching is for any additional curve twisting beyond just a half bp or even a few bps of inversion. Until then, it’s useful enough to validate our thesis about what’s going on in the rest of the global bond market (front = Fed, not growth nor inflation only deeper whiffs of Conundrum No5). Other than that, I still don’t anticipate it to be anything but boring for the next little while.


Eurodollar Futures Price Data:

If you’re looking for the current intraday prices, and don’t mind them being 10 minutes behind, the CME where these contracts trades displays near-real time price and contract data for all those in the colors (they don’t break them down by color, but that’s easy enough).

https://www.cmegroup.com/markets/interest-rates/stirs/eurodollar.html


Should you want/need historical data, you can use Bloomberg or some other data provider. These are available at sites like Barchart.com, where you have to look up each contract individually (it’s not hard to find all of them on the whole curve; just use the search function). Here’s the link for the current front month (for the whites, anyway):

https://www.barchart.com/futures/quotes/GEh22/price-history/historical

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Economics

Oil Could Be The Haven Stocks Traders Need To Shelter From Fed

Oil Could Be The Haven Stocks Traders Need To Shelter From Fed

By Nour Al Ali, Bloomberg Markets Live commentator and analyst

Oil is starting to look like an unlikely haven from the stocks selloff in the run-up to anticipated Fed tightening.

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Oil Could Be The Haven Stocks Traders Need To Shelter From Fed

By Nour Al Ali, Bloomberg Markets Live commentator and analyst

Oil is starting to look like an unlikely haven from the stocks selloff in the run-up to anticipated Fed tightening.

Traders are pricing lower volatility in the commodity than in the Nasdaq and S&P 500. Barometers of market anxiety for both indexes have shot up recently, suggesting trader sentiment is souring. Meanwhile, the CBOE Crude Oil Volatility Index, which measures the market’s expectation of 30-day volatility of crude oil prices applying the VIX methodology to USO options, shows that oil prices are expected to remain relatively muted in comparison.

With a producer cartel to support prices, the outlook for oil is more sanguine, even if the Fed raises rates. The commodity has ample support, with global oil demand expected to reach pre-pandemic levels by the end of this year. The U.S. administration has been pushing oil-producing nations under the OPEC+ cartel to ramp up output, while the group has stuck to a modest production-increase plan and is expected to rubber-stamp another 400k b/d output hike when they meet next week. This means that oil is likely to stay a lot more stable than in recent years.

The relatively low correlation between the asset classes provide diversification benefits. The relationship between the S&P 500 and the global oil benchmark is weak and lacks conviction; it’s even weaker between the Nasdaq 100 and Brent crude contracts. The divergence in price action this week could indicate that stocks have been tumbling in fear of a hawkish Feb, more so than geopolitical risk alone. That would perhaps offer traders an opportunity to seek shelter amid stock volatility in anticipation of the Fed’s next move.

Oil might have tracked the decline in stocks at the beginning of this week, but the commodity is back to its highs now. It’s up close to 15% this year, while the S&P 500 is struggling to reclaim its footing after plunging as much as 10%.

Tyler Durden Wed, 01/26/2022 - 13:45

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Economics

AT&T down 10% despite topping estimates

AT&T (NYSE: T) has revealed that Q4 results indicated continued users for the HBO MAX, wireless and fiber segments. In addition, the company gained more postpaid phone users for the whole year than the last ten years adding one million fiber subscribe

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AT&T (NYSE: T) has revealed that Q4 results indicated continued users for the HBO MAX, wireless and fiber segments. In addition, the company gained more postpaid phone users for the whole year than the last ten years adding one million fiber subscribers. Similarly, the company beat its high-end outlook for international HBO Max and HBO users with almost 74 million subscribers as of December 31, 2021.

CEO John Stankey said:

We ended 2021 the way we started it – by growing our customer relationships, running our operations more effectively and efficiently, and sharpening our focus. Our momentum is strong and we’re confident there is more opportunity to continue to grow our customer base and drive costs from the business.

Q4 2021 revenue dropped 10% YoY

Consolidated revenue in Q4 2021 was $40.96 billion beating consensus estimates $40.68 but dropping 10% YoY, which reflects the impact of divested segments and low Business Wireline revenues. In the third quarter, the company divested US Videos, and in Q4, it divested Vrio. The drop was partially offset by high Warner Media revenues, recovery from pandemic impacts, and high Consumer Wireline and Mobility revenues. Stankey commented:

We’re at the dawn of a new age of connectivity. Our focus now is to be America’s best connectivity provider and also ensure our media assets are positioned to grow and truly become a global media distribution leader. Once we do this, we’ll unlock the true value of these businesses and provide a great opportunity for shareholders.

AT&T reported Q4 net income (loss) attributable to $5 billion or $0.69 per diluted shared share. On an adjusted basis, including merger-amortization fees, a share of DirecTV intangible amortization, gain on benefit plans, and related items, the company had an EPS of $0.78 topping consensus estimate of $0.76 per share.

AT&T had total revenue of $168.9 billion in 2021

AT&T’s consolidated revenues were $168.9 billion in 2021, compared to $171.8 billion a year ago, reflecting the split of the U.S Video division in Q3 2021, as well as the effects of other divested operations. However, higher revenues in WarnerMedia and Communications somewhat offset these declines.

For the full-year, net income (loss) attributable to commons shares was $19.9 billion or $2.76 p were per diluted share. On an adjusted basis, FY 2021 earnings per share were $3.4.

La notizia AT&T down 10% despite topping estimates era stato segnalata su Invezz.

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Economics

New home sales surge, while house price measures decelerate; expect deceleration or even downturns in each

  – by New Deal democratSince I didn’t post yesterday, let me catch up today with a note on both new home sales and prices.New home sales (blue in the graph below) for December rose sharply to 811,000 on an annualized basis. This is the higher monthly…

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 - by New Deal democrat

Since I didn’t post yesterday, let me catch up today with a note on both new home sales and prices.


New home sales (blue in the graph below) for December rose sharply to 811,000 on an annualized basis. This is the higher monthly number since March, and while it is well above the trend since the Great Recession, it is still well below its levels from late 2020:


The red line is inventory. When it comes to new homes, inventory lags not only sales but also prices, so it is not surprising that inventory has increased sharply to a 10 year+ high.

While new home sales are the most leading of all housing metrics, they are very noisy and heavily revised. So in the below graph I compare them with single family permits (red), which have also increased in the last few months, but also are not at 2020 levels:


Because mortgage rates have increased significantly in the past several months, I do not expect this surge in new home buying to last much longer.

Sales lead prices, and for most of 2021 sales were down. So it should not be a surprise that on a YoY basis, price increases are at last abating, shown both monthly (blue) and quarterly (black) in the graph below:


In December, prices were only up 3.4% from one year prior. Since the data is noisy on a monthly basis, the quarterly number, still high at just under 15%, but well below the sharp gains earlier in the year, is more telling.

The deceleration in YoY price gains, which nevertheless are still very high, was also the story yesterday in both the Case Shiller and FHFA house price indexes (light and dark blue in the graph below, /2 for scale). Also shown are the YoY% gains in rent of primary residence and owner’s equivalent rent (how the CPI measures housing inflation)(light and dark red):


My purpose in the above graph is to show that both house price indexes track one another closely, as do both “official” measures of housing inflation. Additionally, as I’ve previously pointed out, house price increases tend to bleed over into the official inflation measures with about a 12 to 18 month lag. Thus on a YoY basis price increases bottomed in 2019, but did not bottom in the official measures of rent until the beginning of 2021. Since the YoY% increase in house prices peaked in mid year 2021, we can expect the “official” CPI housing measure to continue to increase on a YoY basis through roughly late 2022.

This doesn’t necessarily mean that the *total* inflation measure will continue to increase throughout this year. Below I again show the YoY% change in owners’ equivalent rent as above, but also the total inflation index (gold). Most importantly, note that sometimes they track in tandem, but also that generally during the entire house price boom, bubble, and bust from 1995 to 2015 they tended to move in opposite directions:


Why did this happen? Sometimes, as during 1995-2015, home ownership and apartment renting are alternative goods. When more people decide to leave apartments and move into houses, house prices increase while rents flatten. This is generally what happened during the boom and bubble. Then during the bust people were forced to abandon houses and move back into apartments. This is shown in the below graph of homeownership:


Note the huge upward surge until the housing bubble popped, followed by the equally sharp deflation.

Finally, let’s factor in interest rates set by the Fed, shown in black below:


As CPI increases, the Fed typically increases interest rates. By the time the fully effect in owners’ equivalent rent is felt, Fed rate hikes have typically cooled the economy, meaning that the remaining majority of the overall consumer inflation index declines.

Bringing our discussion back to the present, we see that total inflation has been rising sharply since just after the pandemic hit. Owners’ equivalent rent started to rise about 9 months ago. Part of the delay was the big increase in the homeownership rate during that time, driving rents and house prices in opposite directions. The consensus is that the Fed will raise rates several times this year, perhaps starting as early as this spring. If they indeed do so, they will probably continue to embark on hiking rates until the economy slows or even reverses, enough so that price increases - other than rents - decelerate considerably. But while rent measures will continue to accelerate this year, house price increases themselves are likely to continue to decelerate, or even stall in the months ahead.

 

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