CPI at 30 year high. Last time it was here, 10’s were 8.5%

November 11, 2021

–Monster move on monster CPI data with yoy CPI up 6.2% and Core +4.6%, which was followed by a poorly received 30 yr auction at 1.94%, having missed the pre-auction 1.888% by a mile.  NY Fed also released its UIG (Underlying Inflation Gauge) with the ‘full data set’ +4.3%, +0.3 from the previous month, and ‘prices only’ 4.4%, up 0.4%.  With respect to inflation, the Biden team says they’re on it.  Like the border.

–Volume was heavy.  The curve flattened. The US dollar soared, as did gold.  Finally a market reaction in sync with the data.  On the euro$ curve reds were down an astonishing 17.125 on avg, while greens led the pace at down 17.625 (2nd and third year forward).  The two weakest contracts were EDM’23 and EDU’23, both down 18.5 at 9869.5 and 9852.0 (1.35% and 1.48%).  Consider those forward three-month yields against the US ten year treasury at 1.554% (+10.7 bps on the day).  EDU3 to 10y is just about equal.  That forward flatness is also reflected by a new low in 5/30 at just 70.6, nearly 100 off the high from earlier in the year and down 5 on the day. Positive carry is a huge lubricant for the economy, and projected flatness is going to be another economic headwind, without necessarily doing anything to stop higher prices.  The Fed is behind the curve, their projections have been far wide of the mark.  Powell implicitly equated inflation with wage gains, but actual costs of living are outpacing wages, which creates more job-change friction in labor markets.  That is, ‘full employment’ is likely a higher number than they currently believe- higher than 3.8%.  They made it sound like they have the tools to stem higher than expected inflation, but it’s only the hammer of higher rates, which can cause a slew of other problems.  Good luck Lael. If she doesn’t work, Turkey has a deep bench of sidelined central bankers to choose from.  

–New highs in near ED calendars.  Peak is EDM’22/EDM’23 at 88.5, a jump of 12 on the day!  Ten-year tip breakeven made a new high at 272 bps (long term inflation proxy).   

–November midcurve options on euro$’s expire Friday.  EDZ’24 settled 9826.5 and the 9825 straddle settled 8.0.  Ordinarily 8 bps would seem high for just two days, but the contract moved 16.5 yesterday.  Breakeven 9817 and 9833.  Probably priced about right, but I wouldn’t sell it.  

The CME floor used to invite a military honor guard to the floor for a ceremony before the open on Veteran’s Day. It was impressive every time. Dead silence during the ceremony except for the buzzing of unanswered or muffled phones. An explosion of cheers on its completion. I’m not sure but I think Stu Unger was one of the guys that supported the effort. Surprisingly I can’t find a video…

Posted on November 11, 2021 at 5:53 am by alexmanzara · Permalink
In: Eurodollar Options

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