Front end implosion
October 18, 2021
–Eurodollar contracts are under continued pressure this morning with EDZ’22 printing a low of 9922.5, 7.5 lower than Friday’s settle (now trades 9925). On Sept 21, the day before the last FOMC meeting, the settle was 9957, so it’s been the equivalent of one full rate hike in less than a month. The red pack (2nd year forward) was the weakest part of the curve on Friday, settling -9.875.
–Crude oil is again making a new high, with CLZ1 printing 82.64, up 91 cents. China’s GDP was less than expected at 4.9%. Stocks are a bit lower, pulling back from the ramp-up into Friday’s option expiration.
–Friday’s price action featured new highs in near euro$ one-year calendars, with EDZ1/EDZ2 up a whopping 7 bps to 51.5. EDM2/EDM3 jumped 6.5 to end almost 25 higher than Dec/Dec at 73.5. Back spreads declined, for example EDM’24/EDM’25 settled at just 22, a new low for the calendar year and 51.5 lower than the near June/June. The market is pressuring the Fed to consider earlier and more aggressive hikes to deal with inflation. It’s gotten so bad that Hooter’s can’t even afford regular shorts for its server uniforms, and has been forced to go with the “smaller package, same price” model.
–The next Fed meeting is November 3, and at the same time the Treasury’s next quarterly supply announcement is released, with expected cuts to 7 and 20 year sizes which will dovetail with the taper announcement. By the way, a twenty year auction occurs Wednesday.
–It’s reported that China successfully tested a nuclear-capable hypersonic missile which caught the US military off-guard. “Taiwan? Why no, I’ve never heard of it.” TSMC manufactures about 50% of all chips sold in the world.
