Daily Brief For April 5, 2023

The labor market tightens, and the Fed eyes a 5% rate for longer.


Administrative Bulletin

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The Job Openings and Labor Turnover Survey showed a decrease in job vacancies and a tightening of the labor market; vacancies per job-seeker have reduced by 20%, and workers are in a weaker position to bargain.

Accordingly, rate expectations dropped ahead of the next Federal Open Market Committee meeting; traders are bidding up the price of equities.

Graphic: Retrieved from Noura Holdings Inc (NYSE: NMR) via The Market Ear. “Long/short vs SPX rolling returns shows you the pain. Nomura’s quant guru McElligott weighs in: ‘…all of last year’s Equities Alpha was in your ‘Short’ books, which were loaded with ‘Expensive / High Multiple / Low Quality / Un-Profitable’ Growth…but that’s now the stuff that is exploding higher on the violent Rates reset LOWER.”

Federal Reserve President Loretta Mester maintained that the benchmark rate should move and stay above 5% to control inflation, adding that no rate cuts may happen this year, barring a significant change in price pressures. Mester said inflation is on its way out – price growth is likely to drop to 3.75% this year and reach 2% by 2025 – and the banking system is sound, though policymakers are ready to respond to new stresses.

A peek at the Secured Overnight Financing Rate or SOFR market shows activity or the consensus centered at the 95.00 options strike (~5%). Per Bloomberg, large positions include a June 95.00/96.00 1×2 call spread, a June 95.75/95.50/95.25/95.00 put condor, and 95.00/94.75/94.50 put flies in both September and December tenors.

From a positioning perspective, this letter maintains the idea of starting to monetize call structures and rolling profits into fixed-risk bear put spreads. However, given the potential for an underwhelming selloff or “grinding de-leveraging,” keep those debits you pay in check!

To end, the upcoming non-farm payrolls or NFP reports and inflation figures will provide crucial data on the state of the economy.

Graphic: Retrieved from Damped Spring Advisors’ Andy Constan. “6 of the last 6 quarters, the quarter end flow has resulted in a spike or dip and a subsequent 8%+ reversal.”


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