Jackson Hole starts; Powell tomorrow

August 22, 2019

–Yields rose, the curve flattened, implied vol continued to compress.  Tens rose 2.2 bps to 1.577%, but 2’s were up 5.7 bps to 1.567%.  I marked 2/10 at +1, but the spread inverted again briefly during the day.  New lows once again in some of the near one-year euro$ calendars.  EDU9/U0 settled -70 (not a new low) but Z9/Z0 settled -49.5 and H0/H1 at -30.0.  The implication is that easing is coming, but not nearly fast enough to arrest flattening.  On the other hand, there was relentless buying of October 9825 calls, mostly 10 to 10.5 both outright and spread against EDZ9 9825 calls and other strikes.  Open interest in EDV9 9825c rose a whopping 255k to 570k, settling at 9.25, 0.41 delta vs 9818.0.  Along with a buyer the other day of 70k EDH0 9887c for around 10.0, these buys suggest a hedge against a cut of 50 in Sept, or perhaps are related to hard Brexit.  However, implied vol across the curve oozed out.  Last Thursday (8/15) EDZ9 9825^ settled 36.5 vs 33.5 yesterday, EDH0 9850^ from 47.0 to 42.0 and 0EH 9875^ from 51.0 to 46.5.  

–The minutes showed that some members wanted a 50 bp cut and some wanted to hold rates steady.  As the short end has gravitated toward the idea of another 25 bp cut with more to come, it’s reasonable for premium to have pulled back, with Powell likely to try to thread the needle at tomorrow’s Jackson Hole presentation.  However, going into next week it’s worth trying to buy vol.  USDCNY made a new high today 7.09 (yuan weaken to new low) and China is threatening retaliation for September tariffs.  Broad geopolitical risks are likely to overwhelm any good news domestically.  Further deterioration in US/China relations can easily lead to a surprise 50 bp cut at the Sept FOMC.  FFV at 9816 settled just 29 above expiring August.  I believe this is priced too close to a 25 cut and doesn’t nearly reflect proper odds of 50.

Posted on August 22, 2019 at 5:10 am by alexmanzara · Permalink
In: Eurodollar Options

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