Hogs
Feb 25, 2021
–I got a call yesterday from a friend (DK) telling me that the Aug/Oct Live Hog spread was blowing out to new historic highs. I have traded most futures contracts at one time or another, but have never been involved in the meats. It might be because the meat desk at Refco could have been its own sitcom… scared me off. In any case, I took a closer look at the Aug/Oct spread. Supposedly, it’s a seasonal sale, but the nearer contract is just crushing the deferred, and the spread is making new all-time highs. It has never been above 13.50, but now trades 14.45. We might ask, what does it have to do with anything else? I have previously posted some charts on grains which show the same dynamic: front contracts are strong. Here’s the hog spread:
–I also took a look at a deferred WTI one-year crude oil spread, the 6th contract to the 18th contract. In the pandemic pandemonium when the front contract went negative, the calendar was hugely inverted at about -7 dollars. Now, the magnitude is nearly the same, but the front contract is at a premium of about 6.50. Typically, I think of aggressive demand of fronts vs deferred as an indication of tight supplies. The spread chart is in the lower panel.
–In connection with that, at Powell’s testimony yesterday, there was a question about inflation. Powell gave a rather interesting example, relating to the shortage of computer chips that has choked off the manufacture and supply of autos. He said that inflation is an increase in prices which occurs year after year, and although the price of cars may go up due to this temporary shortage, it’s essentially a one-off event. He also was asked about the 25% year-over-year growth of M2, and he flippantly said that the monetary aggregates USED to have predictive capabilities, but now they don’t.
–The Fed is being very clear about NOT being worried about inflation. Brainard also gave a rather interesting speech on the Fed’s thinking about the labor market yesterday as well. The Fed is not worried, but one example after another shows that the MARKET IS WORRIED. Just ask the guy who is short the near contracts….
–Yesterday rates rose, with 10’s up 2.2 bps to 138.2. The curve continued a steepening bias. 5/30 posted a new high 162.7 (using old 5y). Today treasury auctions sevens. EDM3/EDU3, the libor extension kink, settled +1 at 21. The highest settle has been 21.5. One-year calendars on that part of the curve closed at new highs. For example, EDM2/EDM3 closed at 31, up 1.5 on the day, and EDU2/EDU3 at 48, up 2.5 on the day. Option plays continue to favor long puts or put spreads vs calls.
