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Euro$ Futures: There Be Landmines

Summary:
This wasn’t meant to be a running tally. In fact, that was my major point in yesterday’s curve inversion missive; the thing inverted, it stayed inverted for a second day but maybe won’t change much for some time moving forward. Boring and consistent, what matters most in this first stage is only that the inversion sticks rather than expecting big changes in it.We’ll come back to it if or when something changes worth notice. Throw that out the window for Day 3, however. Somewhat surprising even for me (by virtue of all these curves, a known if reasonable, I hope, pessimist), the eurodollar futures curve has noticeably shifted already. Obviously, not in a good way.Whereas the greens had been still upward sloping (as the whites and reds) both Day 1 and Day 2, they are now a tiny bit

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This wasn’t meant to be a running tally. In fact, that was my major point in yesterday’s curve inversion missive; the thing inverted, it stayed inverted for a second day but maybe won’t change much for some time moving forward. Boring and consistent, what matters most in this first stage is only that the inversion sticks rather than expecting big changes in it.

We’ll come back to it if or when something changes worth notice.

Throw that out the window for Day 3, however. Somewhat surprising even for me (by virtue of all these curves, a known if reasonable, I hope, pessimist), the eurodollar futures curve has noticeably shifted already.

Obviously, not in a good way.

Euro$ Futures: There Be Landmines

Whereas the greens had been still upward sloping (as the whites and reds) both Day 1 and Day 2, they are now a tiny bit inverted as well as the blues. And the upside-down down the curve in those blues has grown to 4 bps, quite a two-day expansion for the original single.

Why?

Even if you haven’t seen the Treasury market today, this still wouldn’t be too difficult an answer. Contrary to media reports, the mixed payroll reports almost certainly added more skepticism to an already-existing pile of too much of it. The boom didn’t boom, and it isn’t likely to actually boom apart from blatant media misdirection about the whole thing.

Euro$ Futures: There Be Landmines Euro$ Futures: There Be Landmines Euro$ Futures: There Be Landmines

The yield curve went chaotic after a small knee-jerk sell-off where the crucial calendar spaces and spreads have decidedly shrunk; the 5s10s, a hugely important area of the curve for its intersection between perceptions of now and perceptions of how what’s really going on now are likely to impact the intermediate and longer run (flat = nothing good; rapid flat, you get the point), sunk.

In that 5s10s middle, the yield spread is down to just 22 bps. Even the 2s10s has shrunk by an astonishing 32 bps in just the last seven trading sessions dating back to November 23. At now 75 bps, that represents the flattest this broader part of the Treasury curve has been in over a year.

But this isn’t just payrolls, nor is it limited to the US economy or dollar-denominated markets (which are already global in their reach and scope). And as much as suspected fears of omicron are being put forward as an explanation, the whole thing turned way back in late October, preceding the next corona variant by more than a month.

Both the eurodollar and Treasury yield curves most recently topped out on October 21.

Euro$ Futures: There Be Landmines Euro$ Futures: There Be Landmines Euro$ Futures: There Be Landmines Euro$ Futures: There Be Landmines

However, German bunds (10s) reversed from their minor retracement (yields) on…October 22. And then JGB’s…four days thereafter.

Since everyone once liked and abused the term globally synchronized, for the past six weeks already it has been globally synchronized deflation potential, one after another persisting and escalating into the latest situation.

Eurodollar futures have inverted and that inversion has spread, while the JGB 10s seem likely to take another run at the zero level – which, if reached and breached, would just add another alarm to those already catalogued.

Beyond these more immediate moves in the global “bond market”, this isn’t just the past week, or six weeks. The whole mess dates back to at least mid-March if not all the way to February 25 (yep, Fedwire). It isn’t a new problem; it is an eight-month-old problem that doesn’t seem to want to go away no matter how many times we’re told it already has.

If anything, it is clearly going the wrong way and becoming an ever bigger one as time passes. In that sense, today’s payroll report fits into the pattern only too well:

Maybe I was wrong when I wrote above that the payroll report has been overtaken by events, made irrelevant already by especially the eurodollar futures curve. On the contrary, the inversion in it may actually be quite consistent with this mixed mix of labor data. Like 2018, markets have rebalanced perceptions of rising risks while running out of patience for the boom to actually boom.

This was the year of inflation and “too much” money, they said. LABOR SHORTAGE!!!! and overheated “stimulus.” If none of those were actually true, you might better understand the predicament we find for the world closing out 2021. The source of information and the ability to interpret all of it are and have been all right there.

So, who is “they?”

This current string of events is the further culmination of a decidedly different set of circumstances that have been playing out – consistently, if entirely opposite of what “they” have said – from even before mid-March, going further back in time beyond Fedwire.

Nothing here is, or at least it should not be, surprising or unexpected. The global “bond market” has made the real situation perfectly plain and clear this whole time, even if or as consumer prices in the US and elsewhere have made it seem something else. And stocks, well, they’re equities.

We’ve been talking about landmines for about a month now!

The Fed isn’t these other markets; it sure hasn’t “rigged” eurodollar futures in any way, nor has it somehow boosted the dollar (regardless of the fantasy of interest rate differentials).

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The data has been, as I’ve written, particularly unambiguous about dollar shortage, risk aversion, collateral scarcity (occasional outright shortage; maybe today?), all the things that would lead any rational, honest observer to have expected in at least broad strokes the general outcomes I wrote about above. Pretty much the whole year (in fact, going back to the end of last year).

Eurodollar futures isn’t the end of the list, either. This one curve is merely refusing to be boring, thereby taking the lead in representing all these other wrong things.

Jeffrey P. Snider
As Head of Global Investment Research for Alhambra Investment Partners, Jeff spearheads the investment research efforts while providing close contact to Alhambra’s client base. His company is a global investment adviser, hence potential Swiss clients should not hesitate to contact AIP

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