Feb 16. Inflation pops, interest rate futures yawn

–CPI prints +0.6 with Core yoy equal to last year’s high of +2.3, but market response was fairly muted.  Yesterday I mentioned the possibility of accelerating inflation but I would have thought rates would have jumped higher.  Euro$ calendars (near spreads) made new highs, but EDM7/EDM8 was only +2 to 56.  There was an adjustment in FF futures, but both March and April contracts only indicate about 37% odds of a hike in March.  May FF settled 9919.5 (with an FOMC meeting on May 3).  If there were a hike in March then FFK should trade 99.095.  if no hike in March but a hike in May then 9911.5/12.

–The lack of downside enthusiasm was also apparent in the options market, with vols lower in treasuries across the curve.  TYM7 closed down 2/10’s at 5.0, and I marked the TYJ straddle at just 4.6.  USM 149 straddle closed 6’12, down from 6’26.  A Bloomberg piece today notes that a couple of shops ratcheted up their Core PCE price measure (the Fed’s preferred), and noted that the Fed may have already reached the price mandate.  Market response, ‘so what?’

–Once again belly led, with fives up 4.2 bps to 2.00 and tens up 3.2 to 2.50.  In dollars greens were weakest, closing -4.875.

–There were a few large ED trades.  Over the past few sessions EDZ7 9837/9812/9787p fly bought from 4.25 to 5.5.  Yesterday another large EDZ7 trade:

+50k 9837p/ -200k 9825p / +200k 9812p / -50k 9800p/ -100k 9787p / -100 9875c.  According to Open interest, the 9812p were an exit, as were 9787p.  Which leaves +50 9837p/ -200 9825p/ -50 9800p and -100 9875c.  If there were any chance of 4 hikes this would sting a little. Speaking of stings, there were reports of a short vol fund in equities buying back significant amounts of calls on S&P’s.  Price action corroborates, but appears for now to be one day blip.

Posted on February 16, 2017 at 5:32 am by alexmanzara · Permalink
In: Eurodollar Options

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