Commodity washout
July 6, 2022
–Commodity dump with CLQ2 (WTI) down over $10 at one point; late market was 99.62 down 8.82 but this morning CLQ2 is back just above 100. Other products hit hard as well, for example Sept Wheat down 39 cents and Copper down 19 cents. The ten year breakeven (treasury yield minus inflation indexed note) made a new recent low of 232 bps, having seen a peak of just over 300 in April. The Fed appears to be successfully squeezing out inflationary expectations by replacing them with expectations of a hard recession. The high in this spread in 2018 was around 219 bps. In that year the Fed hiked to an ultimate peak of 2.25-2.50%, higher than the b/e spread.
–New low in EDU2/EDU3 one-yr calendar at -15.5 (down 2 on the day). Remarkably, as recently as June 14 this spread was positive 66. It is STILL the highest one-year calendar until EDH4/H5 which settled -13.5. One other spread worth mention is FFQ2/FFF3, Aug to Jan Fed Fund spread, which settled 98 bps, down 8 on the day. Recent high in this spread was 144.5 on June 13. There are FOMC meetings on July 27, Sept 21, Nov 2 and Dec 14. The July meeting is prior to the August contract of course, so the Aug/Jan spread captures three meetings. 50, 25, 25? A lot will depend on the July outcome and how the market reacts. Current EFFR is 158, another 75 in July would mean 233 and just 50 would mean 208. So Aug FF either 9767 or 9692; FFQ2 settle 9773.0. In any case, the bias next year is for Fed easing.
–Heavy sales of SFRH3 9825c at 10.5 and 11. Settled 10 vs 9679.5, about 40k sold which appear to be an exit. The quick reference is the CME website Daily Bulletin, but apparently the exchange doesn’t think the product is important enough to produce a daily volume and open interest sheet for SFR options.
–Today’s news includes JOLTS (job openings easing lower), ISM Services expected 54 from 55.9 and the FOMC minutes.
–Here’s an amusing quote from Yahoo Finance: “Monthly sales volume on the largest NFT marketplace, OpenSea, plunged to $700 million in June, down from $2.6 billion in May and a far cry from January’s peak of nearly $5 billion.” I honestly can’t believe there is still $700 million of volume!
