Rate Traders Focus On Payrolls Report For Clues: On Ice or 50 Basis Point Cut?

Active session with almost 2 million options contracts traded
Floor volume slightly ahead of screen volume
Trend of buying upside mostly intact
Interest Rates Report

Interest Rates Report

ED Futures and Options Market Recap: September 5, 2019


Futures hit their lows early in the overnight session on trade war news and traded sideways until a strong ADP number moved them lower. This all paled in comparison to the drop following a strong ISM Non-manufacturing number moved us to session lows.

Big Trades

EDU0/EDZ0 99.375/99.625/99.75/100.00 call condor stupid, paying 9.5 on 40K

EDH0 98.00/98.25 put spread vs selling 98.875/99.25 call spreads, paying 1 for the call spread, 30K

EDZ9 97.875/98.00/98.125 put tree, paying 1.75 on 20K

EDZ9 97.50/97.875 call spread, selling 100K at 32.5 (see note)


Things to Watch in Interest Rate Futures

#1 Huge pullback today, with EDZ0, at one point, retracing a month’s worth of advances in a few short hours. Given that, we didn’t see much in the way of downside buying, except for the EDZ9 put tree. It seemed as if the pullback was merely an opportunity to re-enter longs at better levels.

#2 Large liquidation today in EDZ9. Although I do not recall the specific trade, it would seem that this position was accumulated through a variety of trades. Either way, the timing was odd. It was done after the ISM number. Perhaps they were expecting something different from today’s numbers and were surprised. Or maybe after seeing those numbers the idea of further appreciation, much like the idea of cutting 50 bps in September, seemed unattainable.

#3 Recently, I had stated that I wasn’t sure what event or economic number would be able to move us as aggressively down as we seem to move up. Well, I got my answer! A decent ADP number followed by a strong ISM Non-manufacturing number broke the Eurodollar futures down violently. It’s the first time in recent memory that an economic number had that type of effect. Is the ISM Non-manufacturing number that important or was it more a function of where we were, which was at contract highs in EDU0 and back. A strong NFP tomorrow could put the 50 bps cut idea on ice and move us lower. And remember, any sustained move lower could be dicey based on positioning. What a time to be involved in short term interest rates!

About the Author

Albert Marquez works for Chicago Capital Markets (CCM) and covers Eurodollar & Treasury Options and Futures. Albert can be reached  on Twitter @STIR_Report or amarquez@ccmmarkets.com