MLK holiday/ abbreviated session
January 17, 2022
–Reds (2nd year) weakest on the euro$ strip Friday closing -9.625. Two year treasury yield jumped 7 to 96.5 as the market focuses on the pace and magnitude of upcoming rate hikes. Tens rose 6.2 to 1.77%. A couple of large ED option trades show the bias: +30k EDJ 9900/9875 put spread for 1 ref EDM2 9926 and +50k EDU2 9862/9837ps for 2.75. New high for the cycle in EDH2/EDH3 which settled up 6.5 at 105. From having been circumspect about the possibility of ANY hiking in 2022 as recently as Q3 2021, the market is now set for 4 or more 25 bp moves in 2022.
–China, on the other hand, eased with a ten bp cut in the 7-day reverse repo rate and one-yr lending rate. China GDP slightly better than expected at 4% but damage from the property sector continues to weigh. As of this writing TYH2 is making a new low of 127-25, nearing ever closer to the TYH 127 put which has peak open interest of 321k. (TY futures have 3.8 million open). That put settled 22 with -0.27delta vs 128-06. Feb treasury options expire Friday and should see decent activity as players scramble to control gamma exposure. March WTI crude made a new high early this morning of 84.09, though is now slightly lower on the day. I guess the whole charade of releasing SPR supply hasn’t had its intended effect.
I’ll take the Under, Jamie
January 16, 2022- Weekly comment
EDH’22/EDH’23 one-year eurodollar calendar spread settled at 105 bps on Friday, a new high for the cycle for any one-year spread. FFF’22/FFF’23 one-year FF calendar spread settled 94.75 (also a new high, in September it was 20), so the market is settling in on the idea of four 25 bp hikes over the next year, spurred in part by the comments of Fed officials and also by huge inflation data releases this past week (7% yoy CPI). Jamie Dimon on Friday said he wouldn’t be surprised with 6 or 7 hikes by the Fed in 2022. Bill Ackman impetuously tweeted on Saturday that the Fed needs to start with a 50 bp “shock and awe” hike. The front end has become pretty beared-up, with trades like buys of 30k EDJ2 9900/9875 put spread for 1.0 (April expiry on EDM2 which settled 9926.0), and 50k EDU2 9862.5/9837.5 put spread for 2.75 (Sept expiry on EDU2 which settled 9900.5). Consider that the 9900 top strike on the April put spread is over 75bps higher than the current libor setting, so the Fed would have to aggressively raise three times in short order for that trade to play out. It looks like a Bill Ackman trade.
In 2004 the Fed began a hiking campaign that consisted of a 25 bp hike at every meeting for two years. But I briefly went back to examine an earlier hiking cycle, which began in 1994, which was of the aggressive nature that the April put spread buyer would like to see. (Chart below, 1992 to 1995)
At the time, FF had been on hold for over a year at the then-low rate of 3% as shown by the white line on the chart. CPI (green line) was actually trending lower even as the Fed began to hike. There was a shot across the bow 25 bp hike in Feb 1994, followed by two more 25 bp hikes in March and April. In May, there was a 50 bp hike from 3.75% to 4.25% and then another 50 in August. The coup de grâce was a 75 bp zinger in November to 5.5%, which marked the top for long end yields that quickly started to fall. The ten year yield had started 1994 around 5.5%, and topped in late October just above 8%.
It feels as though sentiment is shifting to the idea that a much more proactive Fed could be setting up for something like 1994. But there are a lot of reasons to think that four 25 bp hikes are an absolute maximum for 2022. For example, in 1994 Federal debt to GDP was around 64% versus 122% now. Stock market cap to GDP in 1994 (Wilshire 5000) was around 61% vs 205% now. The state of the economy is highly dependent on asset values, which, according to theory, are tangentially related to interest rates. A decline of 25% in stocks would currently be the equivalent of six months of GDP!
Let’s consider the inflation picture for a minute. My personal belief is that inflation will remain quite high by recent historical standards, but that it will almost certainly decelerate going into the second half of the year. In Jeffrey Gundlach’s latest presentation, he mentioned that ISM Prices almost always lead moves in CPI. I have recreated a chart below, and ISM prices (white line) have clearly rolled over for now. The yoy growth in M2 slowed from a torrid pace of 27% last year to around 12.7% now. Still high relative to past history, but its growth rate will likely decline further with the Fed’s taper.
Finally, China is set to release its Q4 2021 GDP numbers on Monday, with expectations of 3.6%. The yuan has been quite strong, and there is good reason to think that China would favor a weaker currency, perhaps shortly after the Beijing Olympics (Feb 4 to 20) and before the National Party Congress in autumn. My belief is that a weaker yuan would be somewhat deflationary.
This week’s sharp rise in short end rates (2yr note up nearly 10 bps to 96.5) had little impact on the longer end of the curve, where tens and thirties were nearly unchanged at 1.77% and 2.113% both up less than 1 bp. On the euroodollar curve, the March’22/March’23 calendar spread which I mentioned at the top of the note, rose 6.5 on the week to 105.0. But March’23/March’24 actually FELL 5 bps to just 48.0 and March’24/March’25 also fell 5 to end barely positive at 5.5. The back end of the curve will invert if the Fed becomes too aggressive, and that’s why 6 to 7 hikes are NOT in the cards.
| 1/7/2022 | 1/14/2022 | chg | ||
| UST 2Y | 86.6 | 96.5 | 9.9 | |
| UST 5Y | 150.2 | 154.4 | 4.2 | |
| UST 10Y | 176.6 | 177.0 | 0.4 | |
| UST 30Y | 211.2 | 211.3 | 0.1 | |
| GERM 2Y | -59.3 | -58.3 | 1.0 | |
| GERM 10Y | -4.3 | -4.5 | -0.2 | |
| JPN 30Y | 71.5 | 71.7 | 0.2 | |
| CHINA 10Y | 281.9 | 279.2 | -2.7 | |
| EURO$ H2/H3 | 98.5 | 105.0 | 6.5 | |
| EURO$ H3/H4 | 53.0 | 48.0 | -5.0 | |
| EURO$ H4/H5 | 10.5 | 5.5 | -5.0 | |
| EUR | 113.64 | 114.16 | 0.52 | |
| CRUDE (active) | 78.44 | 83.30 | 4.86 | |
| SPX | 4677.03 | 4662.85 | -14.18 | -0.3% |
| VIX | 18.76 | 19.19 | 0.43 | |
Blame it on…
January 14, 2022
–Blame it on Brainard…and other Fed officials who are teeing up an initial hike in March (which the rates market had already priced). SPX -1.4% and Nasdaq -2.5%. April Fed Funds settled 9969 or 31 bps, as compared to the current Fed Effective rate of 8 bps. So 23 of an expected 25 bp hike is priced. All I can say is, it’s two months until the March 16 FOMC and a lot can change. In September of 2015 when liftoff was all but certain, an emerging market swoon delayed the move until December. Of course, at that time the inflation numbers were much tamer than this week’s CPI of 7% and yesterday’s PPI of 9.7% with Core 8.3%.
–It was a nice throwback to see “Dr Doom” quoted in a Bloomberg story today; Henry Kaufmann had been the chief economist at Salomon Bros in the late 1970s and 1980s and wants someone to step into Volcker’s shoes and crank up rates to crack inflation. An economy that is completely dependent on asset values can’t handle a discount rate that diminishes the fantasy of future cash flows, but….Dr Doom.
–Dec Retail Sales today expected modest at +0.1%, though BofA data apparently forecasts -1.3%. With all the talk of shipping delays, Christmas sales were likely pulled forward into November, and of course, the blockbuster Consumer Credit number for Nov ($19 billion revolving) would seem to bolster that argument, but the Nov Retail Sales numbers weren’t wildly strong. There’s a headline on Bloomberg that the IRS is going to crack down on transactions over $600 in an attempt to squelch side “side hustles”. This, as smash and grab looting continues without consequences. And I am not just talking about Pelosi’s trading. It’s like a Kafka novel.
–The eurodollar curve flattened a bit with the whites unchanged as near term hiking has been adequately priced, while greens through golds were up 3 to 3.5. The ten year yield fell to 1.708%, down 2.2 on the day and back below last year’s high yield. False breakout? I don’t think so. On the other hand, another throwback from the 1980’s, “bond vigilantes” have all but disappeared.
Worst is over?
January 13, 2022
–CPI hit 7% yoy, with Core 5.5%. There are hints in the financial press that the worst is over in terms of inflation. In the Chicago area we’ve had a couple of days of sub-zero weather. We’d like to think the worst is over…but it’s only mid-January. It’s still going to be cold. FT notes a ten year high in nickel as demand for electric vehicles builds. New high in WTI yesterday with CLG2 printing 82.57 late, +1.35. Recent high on Oct 25 was 82.13. Not much reaction to the ten-yr auction yesterday; at futures expiration TYH was 128-185 and the 10y yield was 1.725, down 1.9 bps. But by electronic close TYH was trading 128-11+, where it is now. Thirty year auction today.
–Gundlach mentioned that CPI tends to follow ISM prices paid, and the latter indicator has taken a big drop recently. Without fiscal and monetary stimulus the economy is likely to slow. Several Fed officials have moved up their hiking projections; Bullard (the most likely Fed official to sell low and buy high) says that four hikes are likely this year. The eurodollar curve edged a bit flatter with reds +1.75 and golds +4.5. There is only a 20 bp difference between the last red (EDZ’23 at 9815.5) and the last gold (EDZ’26 at 9795.5). The 5/10 treasury spread is at a similar value of 23.3.
–February treasury options expire one week from tomorrow; April puts in TY are starting to see some action with TYJ 126p the peak OI so far at 14.7k, settled 21 with a -0.19 delta vs M2 128-145. TYH2 127 puts maintain peak OI interest with 310k open, settled 16 with delta -0.21 vs 128-185.
–Vol easing out of rate products. For example, EDZ2 9875^ settled 47.5 yesterday, -1.5 with futures +0.5 at 9879.5. Recall that after the Dec FOMC there was an aggressive seller of over 50k EDZ2 9900 straddles at 51.5 to 50 when that was the atm strike. Even though the put is now 20.5 in the money, that straddle settled 50.0 yesterday. A grind back up towards strike will see the 9900 straddle trading 45 very quickly.
–Today’s news includes PPI expected 9.8% yoy with Core 8%. Could we possibly see a 10 handle? Additionally, Brainard testifies at her nomination hearing. The prepared remarks were released yesterday:
“But inflation is too high, and working people around the country are concerned about how far their paychecks will go. Our monetary policy is focused on getting inflation back down to 2 percent while sustaining a recovery that includes everyone. This is our most important task.”
–Well they were pretty good at getting inflation slightly above the 2% target, but even though the talk has turned tough, they won’t have the stomach to tighten the monetary screws if stocks turn lower.
Unprecedented (but we knew that)
January 12, 2022
–CPI today expected at cycle high of 7% yoy as Powell yesterday acknowledged that high inflation can cause problems and vowed to do something about it. Yields fell, the curve flattened. Tens ended at 1.744%, a pullback testing last year’s March high. Re-opening auction of 10s today, with 30s tomorrow. Beige book is also released in front of the Jan 26 FOMC meeting. Domino’s CEO Rich Allison summed up the situation: “We expect unprecedented increases in our food basket costs versus 2021.”
–New low in the 5/30 treasury spread yesterday at 56.5 bps. That’s about the same level, and going in the same direction, as it was at the start of 2018, when the Fed was simultaneously tightening and trimming the size of the balance sheet (as Mester recommends now). And the Fed hasn’t even STARTING hiking rates yet, though the idea of four moves in 2022 is being priced and accepted. EDH2/EDH3 settled exactly at 100 yesterday. Anyway, Q4 2018 culminated with a 20% drop in SPX, as Powell kicked off the quarter by saying “We’re nowhere close to neutral” and balance sheet selling was moved up to $50 billion per month in Oct 2018 (it had increased $10b per quarter).
–Of course in 2018 SPX went from just under 3000 to around 2400. And the Fed’s balance sheet in 2018 (which they thought was prudent to trim) was $4.4 trillion. At the end of 2021 the balance sheet was about double where it started 2018. And SPX pretty much got up to double from the end of 2018.
EDH2/EDH3 exceeds 100 bps
January 11, 2022
–Powell’s prepared remarks for today’s appearance in support of his re-nomination were released yesterday afternoon:
The economy has rapidly gained strength despite the ongoing pandemic, giving rise to persistent supply and demand imbalances and bottlenecks, and thus to elevated inflation. We know that high inflation exacts a toll, particularly for those less able to meet the higher costs of essentials like food, housing, and transportation. We are strongly committed to achieving our statutory goals of maximum employment and price stability.
His main concern has shifted from employment for the less well-off to the negative effects of inflation on budgets.
–Goldman called for four hikes this year, Dimon one-upped them. EDH2/EDH3 made a new cycle high, finally exceeding 100 bps at 101.5, up 3 on the day. EDM2/EDM3 also closed at a new high of 93.5, up 2. April Fed Funds fully capture the March FOMC result. FFJ2 settled 9969.5 or 30.5 bps. The average Fed Effective rate to which the contract settles has been 8 since the start of December. Therefore, 22.5 bps of a potential March move is priced. Slight new low in 5/30 at 57.2, as the idea of front-loaded hikes supports the long end. Implied vol in treasuries eased as the morning’s initial selling pressure in TY abated.
–There has been consistent selling pressure on FVH futures, with an additional exit of 25k FVG 120.25c yesterday at 3.5. FVH settled 119-18; the cash yield rose 3.5 bps to 1.537%. Today the treasury auctions $52 billion 3-yr notes, followed by 10s and 30s Wed and Thursday.
Making Widgets
January 10, 2022
–Tim Cook pulled down $100 million dollars last year. There’s a cute story on the NY Fed’s blog Liberty Economics on “The Effect of Monetary and Fiscal Policy on Equality.”
–From FT: ECB’s Isabel Schnabel says low-carbon economy ‘poses measurable upside risks’ to inflation projections over medium term.
–In the last couple of days I have seen articles about shortages of energy, tires, potatoes, and the one below, on ammunition.
–“Capitalism is on our side” according to Alan Blinder. “…competitors should enter the market and invest in new factories, or existing firms should expand existing capacity to seize market share, eventually leading to reduced prices.” [However, we know that massive rounds of QE went into share buybacks and consolidation. Also wouldn’t new competitors imply demand for capital?]
This reminds me of the ‘Back to School’ economics class clip with Rodney Dangerfield. (below)
Profits, said Priyadarshi, have gone to share repurchases and paying down debt.
There are several reasons for this, but the main ones are consolidation and high barriers to entry in the industry. Ammunition is difficult to produce, as it requires careful manufacturing processes to safely handle explosive materials. Vista recently bought its competitor Remington out of bankruptcy, lowering the number of firms in the industry that could even build a factory and distribute ammunition effectively. And the limits on capacity were explicit. https://mattstoller.substack.com/p/concentrated-firepower-what-high
–German bund yield has almost crossed into the world of the living with a positive yield. Now around -3 bps. On Friday the US ten-year broke out above last year’s high of 1.742%, ending at 1.766%. Seems like a fairly high yield…until you compare it with the expected yoy 7% CPI expected on Wednesday.
–EDH2/EDH3 one-year calendar spread hit a new high of 98.5 bps on Friday, nearing 100, which would imply four hikes a year. Bob, the remote intern working for Goldman, mentioned it to his three roommates who seemed duly impressed, so he relayed the intel to his boss, who promptly put out a forecast that Goldman Sachs research now expects four rate hikes in the next year. Bloomberg is leading with the story on its website this morning.
https://www.bloomberg.com/news/articles/2022-01-10/goldman-now-expects-four-fed-hikes-sees-faster-runoff-in-2022?srnd=premium
–I learned a lot about Kazakhstan this weekend, but still don’t know what the “h” is doing in there. Anyway, most of it is starkly depressing, but the Russian ties and installations in the country make it likely that some sort of order will be rapidly restored. Then there’s this from Fortune:
The “hash rate,” the random codes that win fresh awards of Bitcoin, collapses. A few hours into the outage, Larry Cermak of the crypto news and research site The Block tweeted that a full 12% of Bitcoin’s worldwide computational power had vanished. His data showed sharp declines for a number of producers with operations in Kazakhstan. The hash rates for AntPool, Poolin and Binance Pool all fell between 12% and 16%.
Imbalances
Weekly Comment – January 9, 2022
Yields surged in the past week, with the ten year ending the week at 1.766%, through last year’s high of 1.742% set at the end of Q1. The change from the previous Friday was 27 bps. A burst of selling pressure came after Wednesday’s release of December’s FOMC minutes, which contained a discussion of balance sheet reduction. Although Friday’s nonfarm payroll data was weaker than expected at just 199k, the unemployment rate dipped below 4% to 3.9, and yoy Avg Hourly Earnings rose 4.7% vs an expected increase of 4.2%. A ridiculously large jump in November’s Consumer Credit figures (released Friday afternoon) added to a sense of economic imbalance, with a record month of $40 billion, including a $19.8 billion increase in revolving credit (credit cards).
In eurodollars, EDH22/EDH23, the March to March one-year calendar spread, settled at a new recent cycle high for any 1-yr at 98.5. No 1-yr spread has yet exceeded 100 bps in this cycle. I had done a small study of calendars and found that, at the onset of changes in Fed policy, the spreads do a pretty good job of estimating the amount of Fed rate hikes in a given year, at least initially. In Fed funds, the spread from January’22 to January’23 is 83.75 (9991.75 vs 9908.0). This spread is therefore forecasting between 3 and 4 hikes by the end of the year. EDH2/EDH3 is projecting four hikes from Q1’22 to Q1’23. So, a hike at every other FOMC meeting. Given the inflation picture, that seems low. Given what appears to be economic fragility beneath a robust surface, it might even be high. Clearly there was a burst of economic enthusiasm associated with fiscal stimulus, as reflected by Reddit flows into meme stocks, but that magic appears to be dissipating. Is a huge increase in Consumer Credit a sign of confidence going forward? Or a sign that gov’t transfers have run out and now the household sector is degrading what had been solid balance sheets? The broader concern is that if the Fed really begins to withdraw accommodation quickly, perhaps fissures will open into gaping chasms (like Q4 2018).
Considering front end futures pricing. the Fed has the blessing of the market to begin hiking. What has changed to a degree is the curve. The long end priced one hike this week. That is, fives, tens and thirties all jumped around ¼% in yield. (30y rose 22.4 to 2.112%). As these increases flow into mortgage rates, there will likely be a modicum of restraint felt in housing. In my opinion, the market has actually priced a March lift-off too aggressively. It’s very unlikely that hikes would occur at both the March and May meeting. April Fed Funds settled 9970.5 or 29.5 bps vs current Fed Effective of 8 bps. In other words, over 21 bps of a potential 25 bp hike is being priced for the March 16 FOMC. I recall 2015, when almost everyone thought Janet Yellen had set the market up for September lift-off. Pricing then as now reflected high odds of a move, but USD strength and a hard sell-off in emerging markets postponed the initial move until December.
Below is a chart of the rolling active TY futures price in white, versus a chart of the last gold on the Eurodollar strip, which is the 20th quarterly, denoted by ED20, currently EDZ’26. As mentioned above, the cash ten-year treasury yield has pierced last year’s high by a couple of bps. On the chart above, you can see that the white line, which represents the TY closing price, has significantly breached the low from late March around 131-00 (corresponding to the cash yield of 1.74%). But look at the last gold, it’s still about 30 bps away from the March/April low which was sub-9760. (EDZ6 settled 9787). Of course, if I had used a yield chart the disparity wouldn’t be quite as glaring; the TY future has a shorter duration than the 10-yr cash and the flattening from October to mid-December was severe as the market priced front-loaded hikes. The flattening was accentuated after Powell retired “transitory” in late November. On the chart you can see that ED20 rallied 40 bps from 9800 to 9840 from end of Nov to start of Dec. That move has now completely reversed, and then some.
The Fed’s overt acknowledgement that inflation might be something more than transitory, along with the now open possibility that actual balance sheet reduction could occur, supports the idea of bear steepening, of which we’ve had a small taste. This could be one of the trades of the year. We’ve seen heavy accumulation of TYH 127 puts which represent a yield of 1.92 to 1.93% on the ten year. These puts settled 23/64 (~4.5 bps) vs 128-095 and have 266k in open interest, more than double the next closest TY option. TYH options expire Feb 18, and these puts are approx. 16 bps out of the money.
We’ve seen some buying in blue and gold midcurve puts this week, but the chart above makes the idea even more compelling. EDH’25 settled 9794.0. 4EH2 9775 puts which settle to that underlying contract on March 11, are 19 out of the money and settled 8.5. There was a buyer of 4EH 9750 puts last week for 3.0; settled 3.5. There are only about 23k open so far in 4EH puts in total, compared to 540k in 3EH and 300k in 3EM puts. So, liquidity in golds (4E) could be an issue. Additionally, even though a potential Fed move in March should be appropriately priced by the start of the month, March euro$ midcurve puts expire 11-March, the Friday prior to the March 16 FOMC.
Now let’s imagine a scenario where the Fed has cued the market to expect a March hike. The inflation data increasingly supports lift-off (CPI is released Wednesday, with yoy expected 7.0% from 6.8% and Core 5.4%). However, some sort of geopolitical event (Kazakhstan?) causes the Fed to hold. Rather than a flight to quality in the long end, yields surge higher as the curve steepens. Though probably low odds, they’re not zero. There are no April midcurve options open in golds, but there are in blues.
Blue June, EDM’25, settled 9798.0. April midcurves expire 14-April (on Thursday due to Good Friday).
Put settles:
3EJ2 9775.0p 10.75
3EJ2 9762.5p 7.50
3EJ2 9750.0p 5.25 (estimated, not open yet)
3EJ2 9737.5p 3.50
Worth 4 for a 3EJ 9762/9737ps?
This should be an interesting week. Powell is in front of the Senate Banking Committee on Tuesday for his re-nomination, with Brainard to follow on Thursday. CPI is Wednesday, with yoy expected 7%. On Tuesday the Treasury issues $52 billion in 3 yrs. Earlier on Tuesday the Fed buys $4.5 billion in 4.5 to 7 yrs, and $1.6 billion is 22.5 to 30 yrs. On Wednesday $36 billion of 10s and Thursday $22 billion in 30s (re-opens) are auctioned. PPI on Thursday and Retail Sales on Friday.
| 12/31/2021 | 1/7/2022 | chg | ||
| UST 2Y | 72.8 | 86.6 | 13.8 | |
| UST 5Y | 125.6 | 150.2 | 24.6 | |
| UST 10Y | 149.5 | 176.6 | 27.1 | |
| UST 30Y | 188.8 | 211.2 | 22.4 | |
| GERM 2Y | -62.0 | -59.3 | 2.7 | |
| GERM 10Y | -17.7 | -4.3 | 13.4 | |
| JPN 30Y | 68.3 | 71.5 | 3.2 | |
| CHINA 10Y | 277.8 | 281.9 | 4.1 | |
| EURO$ H2/H3 | 86.5 | 98.5 | 12.0 | |
| EURO$ H3/H4 | 41.0 | 53.0 | 12.0 | |
| EURO$ H4/H5 | 9.0 | 10.5 | 1.5 | |
| EUR | 113.73 | 113.64 | -0.09 | |
| CRUDE (active) | 75.21 | 78.90 | 3.69 | |
| SPX | 4766.18 | 4677.03 | -89.15 | -1.9% |
| VIX | 17.22 | 18.76 | 1.54 | |
Getting to the door first
January 7, 2022
–Employment report today with NFP expected 400k. This morning WTI crude is above $80/bbl, within $2 of last year’s high. Yesterday a friend mentioned that June’23 Brent 150 calls were bought for 0.95 in size of 10k, a strike that is more than double the price of the underlying.
–The market continues to aggressively price odds of near term hiking. EDH2/EDM2 settled 29 bps and was 29.5 bid, a new high. In October this calendar spread was around 5.5. EDH2 settled 9959.5 or 40.5 bps, compared to the current libor setting around 22. There are FOMC meetings March 16 and May 4. April Fed Funds settled 9970.5 or 29.5 bps vs Fed Effective average of 8, so the market has priced the odds of a March move just over 80%. I personally think May is the more likely meeting for liftoff; FFJ2/FFK2 settled 9.0. FFF2/FFF3 settled 85.75 bps, pricing approx 3.5 hikes for this year.
–Even though the shift in perception favoring near-term hikes had flattened the curve, the ten year yield was up another 2.7 bps yesterday to 1.732%, within a bp of last year’s high. A close above 1.75% could be considered a breakout. What’s surprising is that vol, though not exactly cheap, hasn’t been pushed significantly higher. I marked TYH 128.5^ at 1’48 or 5.0%. TYH 127 put continue to be accumulated, with whopping open interest of 259k, up 14k yesterday. Settled 23/64, delta -0.25. The ten-year will be about 19 bps higher at that strike if the curve move is parallel, or 1.92/1.93%. One notable trade from yesterday was sizable selling of FVH2 120.75c, which settled 11.5 vs 119-2775 (0.24 delta). Open interest rose over 56k on these new sales to 63k, helping to hold down vol. Not sure what this is against, but was done in clips throughout the day, so it’s not likely a naked sale.
–Bitcoin hovering around 42k, near the lows of last September, about 37% off last year’s high, another reflection of the receding tide of liquidity. For now, Nasdaq is holding December’s lows, but the implications of a Fed trying to gracefully withdraw support could start to resemble a Three Stooges episode.
Legacy
January 6, 2022
–Robert J. O’Brien Sr passed away yesterday at 103. I never had the honor of meeting him, but that’s one hell of a legacy to have built a private firm with your name on it, that has thrived and competed to this day. I don’t think that can happen without a core of integrity. He also served as Chairman of the CME from 1967 to 1968, helping to transform the image of the exchange into a respected financial institution.
–Stocks and bonds were walloped after yesterday’s release of the FOMC minutes. SPX sown 1.9% and Nasdaq down 3.3%. Ten year yield rose over 4 to 1.705%. Some financial press summaries have pointed to the idea of faster rate hikes, but that has been priced into the front end of the curve for a long time, with FFF2/FFF3 holding around 75 bps, indicating three hikes over this year. It was a discussion of balance sheet shrinkage which knocked the wind out of the sales. With inflation raging, the only way the thirty year bond yield could remain under 2% was through constant support of the Fed. Further hints on withdrawal from that role only means one thing, and that’s that real rates rise from severely negative levels.
–Some commodities are getting hit this morning, with gold down $25 to around $1800. perhaps with the idea that a Fed more cognizant of the risks of inflation is finally going to get serious about tamping down. However, energy is a key driver of prices, and WTI is up 1.25 this morning to 79.10 (CLG2), within $3/bbl of October’s high. And it’s 8 degrees here in Chicago, that’s when the heating bills get pricey!
–In spite of a move higher in rates yesterday and a huge ADP number of over 800k, implied vol in rates fell on the front part of the curve. Most ED straddles lost 1.5 to 2 bps. I like to gauge the strength of trend by price movements, increases in open interest and higher vol. Open interest across rate futures was mixed yesterday, and vol was quiescent. Price is the most important, of course, but for now it doesn’t seem as if fear has really gripped rate futures. Perhaps tomorrow’s payroll report will do the trick.
