OpEx might lead to exaggerated moves
December 16, 2022
–Large equity option expiry today, along with December midcurves in rates. Data yesterday was generally weak, with Retail Sales -0.6%, Philly Fed Business Outlook -13.8 vs -10 expected. Today’s news includes S&P Composite PMI, expected 46.9 from 46.4 last, the year’s low has been 44.6.
–Vol crushed again in rates with TYG3 115 straddle sold at 2’19 in size of 3k early, settled 2’17. TYH3 115^ settled 2’61 having been sold down from 3’10 to 3’02 on Wednesday. (Pegging 10y yield around 3.5%). SFRZ3 9575^ settled at 99 Wednesday, was sold on a block at 94 early and traded later at 96; settled 96.25 ref 9568.5.
–Short term US curve flattened: whites -3.0, reds 0, greens +2.75 and blues +4.5. The ten year yield fell over 3 bps to 3.45%. Changes in euribor were much more dramatic on hawkish comments from Lagarde post-ECB. ERZ2/ERZ3 jumped 30.5 bps to 105 as ERZ3 settled -26 at 9685.0. Quite a stark difference from the US where SFRZ2/Z3 settled negative 18.25.
–The most inverted one-yr calendar on the SOFR curve is Sept’23/Sept’24 which printed -153.5 yesterday and settled -152.5 (9532.0/9684.5). Going back 20 years the lowest any 1-yr ED calendar has settled is -158.25 in late 2007, and that was the first quarterly vs fifth quarterly, signifying that the need to ease was imminent and obvious. Currently, the market is reflecting a clear bias for ease, but the timing is, of course, later.
–Ten year treasury to inflation-index breakeven ended at 218 bps; early mark at 213.5 is new low for the year.
