Puking camel

November 12, 2021

–Light volume on yesterday’s holiday trade, but pressure on red eurodollars continues.  EDU3 (the last red or 8th quarterly) settled 9876.5 on 5-Nov, one week ago.  Yesterday the contract was 9844.5 or 32 lower.  Technical formation is, of course, the famous puking camel.  Early in the session there was an exit buy of 15k 0EM 9800p for 11, settled 11.75 vs EDM3 9861.5; this was the weakest contract on the board, settling down 8 yesterday.  All near one-year calendars settled at new highs.  The peak is EDM2/EDM3 which closed 92 bps, up 3.5 on the day.  FFF’22/FFF’23 (January one-year Fed Fund spread) settled 64.0, up 5.5 on the day (got it right this time Harish!) indicating 2.5 hikes over the coming year.  Of course, market pricing may not be indicative of actual Fed moves, but the market is clearly pushing for rate hikes to quell inflationary pressures.  And the pricing for those moves is flattening the back end.  Greens to blues (3rd to 4th year forward spread) is only 10 bps and blues to golds (4th to 5th) is only 8.375.  
Whites -3.125, reds -7.375, greens -5.125, blues -3.5 and golds -3.5.

–The dollar index is continuing to rebound to new highs for the year, though it’s not even halfway back from the pandemic 2020 high to the low at the start of this year.  Gold is also having a moment, with GCZ having rallied $100 to yesterday’s 1864 since the low of last week.

–Today brings JOLTS and Michigan Sentiment numbers.   Consumer sentiment is perhaps unsurprisingly weak, as the cost of living outpaces wage gains.  71.7 last, and it’s expected to be around that level.  5-10 year inflation expectations were 2.9% last…I’ll take the ‘over’ on this one.  William’s speaks, but the voice of the NY Fed has become muffled in this cycle.

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…

Ten year TIP record low yield

November 10, 2021

–New low yesterday ten-year inflation “protected” (TIP) yield at NEGATIVE 1.206%.  From the TreasuryDirect website: “The principal of a TIPS increases with inflation and decreases with deflation, as measured by the Consumer Price Index.”  Today CPI is released and is expected 5.9% yoy with Core 4.3%.  CPI hasn’t been above 5.9% since late 1990 when it peaked at 6.3%.  At the time, the US 10y yield was around 8.25% vs 1.43% yesterday.  As an aside, the last time the 10y TIP was around this level in Q3 2020, gold was on its way above $2000 vs 1830 now. 

DO NOT FEAR: “Yellen…said the high inflation that persisted through parts of the 1970s and 1980s occurred ‘because people thought that policy makers wouldn’t bring it to an end, and inflation expectations became embedded in the American psyche.  That isn’t happening now and the Federal Reserve wouldn’t permit that to happen.” (BBG)  That’s expressing a lot of faith in the institution of the Fed when we don’t even know who the Chairman will be next year.  In the previous period it was the towering Volcker, who crushed inflation expectations with sky-high funding rates of 20% in 1981.  The current FF rate is zero to 0.25%, and the Fed is promising to keep it there until unemployment reaches around 3.8% according to Clarida.  But the Fed won’t allow inflation expectations to become embedded.  Just keep telling yourself that Janet. Oh, and China’s factory gate inflation in October rose to 13.5% in October, fastest in 26 years. 
–Big bid in the long end yesterday despite the ten-year auction and today’s upcoming 30y auction.  Both tens and thirties fell nearly 7 bps to 1.43% and 1.82%.  Long end vol bid with USF at 9.3, upper end of range, as we moved to the 162 strike (USH settle 162-05).   

Upside risks to inflation

November 9, 2021

–Yields rebounded yesterday on light volume and the curve flattened as the belly led the way.  EDU’23 was the weakest contract on the euro$ strip closing down 10 at 9866.5.  The five year yield rose 7.2 bps to 1.123% and tens gained 4.7 bps to 1.497% in front of today’s auction.  Clarida said yesterday that he expected conditions to be in place by the end of next year for a rate lift-off, citing a rate of 3.8% as full employment.  Jan’22/Jan’23 FF futures spread is 50.5, signifying market expectations of two hikes by end of 2022.  Here’s a direct quote from Clarida on inflation:
“But let me be clear on two points. First, realized PCE inflation so far this year represents, to me, much more than a “moderate” overshoot of our 2 percent longer-run inflation objective, and I would not consider a repeat performance next year a policy success. Second, as always, there are risks to any outlook, and I and 12 of my colleagues believe that the risks to the outlook for inflation are to the upside.” 

–Bloomberg reports that Biden interviewed Brainard for top job at the Fed.  Vice-chair Quarles resigned yesterday, effective at the end of the year.  Clarida took office as a Board member to fill an unexpired term ending Jan 21, 2022.  Fed changes are in play.

–Today features PPI expected 8.6% with Core 6.8%, same as last month. CPI tomorrow.  This, as the 10-year when-issued yield is hovering right around 1.5%.  The WSJ has a headline noting that China junk-bond yields top 25% as property developers continue to struggle.  It seems as if markets in China are responding to economic conditions while the US treasury market ignores inflation.  The ten-year inflation indexed note yield was negative 113 bps late yesterday; not a record low but getting close. 

–Option volume was light, but a representative trade of pressure on reds and greens was +20k 2EF 9825/9787.5ps for 5.0.  Settled 5.25 vs underlying (green) EDH’24 9852.0.  Midcurve Jan options expire January 14, 2022.  

High gamma new assets

November 8, 2021

–TSLA down this morning as Musk asked the twitter universe if he should sell stock and the answer was ‘yes’.  If I am seeing the correct figures the stock is down about 5% from Friday’s market cap of $1.227 trillion, or around $60b.  Bitcoin is pressing new highs, currently 65990 vs ath on Oct 20 of 66976.  Ethereum is making a new high at 4731.  A lot of capital is changing hands on relatively new assets these days.
–Friday saw yields continue to fall, with tens down 7.3 bps to 1.45%.  Tuesday features the ten-year auction, sandwiched between 3s today and 30s Wednesday (early due to Veteran’s Day on Thursday).  The curve flattened with 2/10 down 5.5 to 105.5 bps.  Implied vol firmed quite a bit in treasuries, indicating fear has shifted to the idea of lower yields.  I don’t know that I have seen this before, perhaps it has occurred and I didn’t notice, but TY week2 calls traded more volume than the regular TYZ calls, 269k vs 215k.  The two expiration days are: Week2, this Friday Nov 12 (day after Vet’s Day) and TYZ Friday Nov 26 (day after Thanksgiving).  There was a new block buyer of 70k TY2X 132.75 call for 4/64 that sparked week-2 activity.  Settled 9 vs 131-265. Several recent analyst notes have pointed out that the huge volume of equity options has surpassed that of underlying stocks, and that many of these trades are high gamma plays, with the implication they are spurred by message boards.   In any case, a snapshot this morning of 2MX1C 132.75 (bbg symbol for week 2 calls) is 3/4 vs 131-16+.  For the sake of comparison, TYZ 132.75c are 7/8.
–Inflation data this week with PPI tomorrow and CPI on Wednesday.  CPI expected 5.9% yoy vs last of 5.4. Can TY rally from a sub-1.5% yield if CPI is ‘better than expected’ 5.6%? The answer of course is ‘probably’ but I still have a hard time wrapping my head around demand for treasuries given the macro backdrop.   November midcurve options on euro$’s expire Friday.  0EX1 9925 straddle settled 10.5 Friday vs underlying EDZ2 9926.5.  Wide breakevens of 9935.5 and 9914.5 for 5 days.  

El Risitas

November 7, 2021 – Weekly note

You have one job: to guide and align policy with monetary and economic goals.

Andrew Bailey, after steering the markets to expect a November rate hike and then failing to deliver:
“I don’t think it’s our job to steer markets day by day and week by week.” 

As Efficient Market Hype @EffMktHype said on a mock-up of the famous El Risitas interview (The Giggles, otherwise known as the laughing Spaniard): “If these guys taught a communications class, it would be sign language in the dark.” (Link at bottom, not appropriate for all work situations, but succinctly captures market conditions leading to this week’s whipsaw).

Obviously the Fed takes its communications and guidance seriously and Wednesday’s taper announcement was fully expected.  However, on the week there were large changes in rates and expectations.  US 2y yield fell 9.4 bps to 39.5.  Fives sank 13.4 to 1.05%.  Tens fell 10.2 to 1.45%.  On the euro$ strip, EDZ’21/EDZ’22 plunged 11.5 bps to 55.0 and FFF2/FFF3 dropped 12.5 from 58 to 45.5, essentially shaving half a hike from expectations for next year. The 5/30 treasury spread steepened modestly from 74.6 to 83.0  The low on Oct 29, 74.6. is the lowest the spread has been since the Covid volatility of March 2020.  Inaction by the BOE led rates to drop everywhere.

The week’s action concerning stirs has been well reported.  As an example, Sept’22 short sterling was 9945.5 on Sept 21, just prior to the MPC meeting.  By Oct 29 it was 9864, a plunge of 81.5.  After this week’s meeting, the contract settled Friday at 9899, a rebound of 35 on the week.  Wild.

Perhaps the idea of financial stability is destined to become more of an issue.  Similar to the 1999 dotcom bubble, all I am hearing about now is crypto.  I personally think economic growth and prosperity comes from investment and productivity.  To me, blockchain fits that bill.  But the plethora of crypto currencies and pyramid schemes being hawked on this basis is nothing more than the South Sea Bubble.  Maybe it’s not big enough to make an economic dent if and when the unwind comes.  However, according to CoinMarketCap.com, the total capitalization of all coins as of Sunday is $2.77 trillion.   Of this, Bitcoin and Ethereum are $1.71 T combined.
https://coinmarketcap.com/charts/

Many commentators have called the rise of cryptos a failure in confidence of fiat currencies.  I am sure there’s a kernel of truth to that.  However, all sorts of asset valuations are suspect at this point. 

Consider the chart of Zillow, down 67% from the high in February.  From MarketWatch: “In announcing its latest quarterly earnings on Tuesday, Zillow confirmed that it will ‘wind down’ its Zillow Offers division that focused on buying homes, refurbishing them and then selling them, hopefully for a profit.  But the profit piece was missing.”  The market cap of Z has evaporated by $34 billion to $16.8b from a high of $50.8.  This is a company which supposedly has expertise in valuing homes. I don’t know if Z touts AI in its methodologies.  But I think a lot of companies that do will end up being painted with the A brush over time: Artificial.

Zillow’s entrance into the home-flipping business has a lot in common with crypto-ccy flipping.  A big part of “financial engineering” is predicated on negative real rates.  The fact that valuations rise given inflation and highly negative real rates is not permanent.    

Coming up
Tuesday: PPI expected +.8.6%
Wednesday: CPI expected 5.9% from 5.4% with Core 4.3% yoy.  Jobless Claims 265k
Thursday, November 11: VETERAN’S DAY
Friday: JOLTS and U Mich indicators

Treasury auctions Monday, Tuesday and Wednesday of 3s, 10s, 30s. 

	10/29/2021	11/5/2021	chg
UST 2Y	48.9	39.5	-9.4
UST 5Y	118.5	105.1	-13.4
UST 10Y	155.2	145.0	-10.2	W/I 146.7
UST 30Y	193.5	188.4	-5.1	W/I 188.3
GERM 2Y	-58.4	-72.9	-14.5
GERM 10Y	-10.6	-28.0	-17.4
JPN 30Y	66.5	67.1	0.6
CHINA 10Y	297.0	289.0	-8.0
EURO$ Z1/Z2	66.5	55.0	-11.5
EURO$ Z2/Z3	61.0	59.0	-2.0
EURO$ Z3/Z4	17.0	23.5	6.5
EUR	115.63	115.52	-0.11
CRUDE (active)	83.57	81.27	-2.30
SPX	4605.38	4697.53	92.15	2.0%
VIX	16.26	16.48	0.22

Viral star El Risitas – known for the ‘Spanish Laughing Guy’ meme – dies aged 65

Viral star Juan Joya Borja – known as the man behind the ‘Spanish Laughing Guy’ meme – has died aged 65, with tributes pouring in.

The Spanish comedian and actor, aptly nicknamed ‘El Risitas’ (‘The Giggles’) is best remembered for bringing millions of people joy with his distinctive laugh, when he was interviewed on Spanish TV.

The star told a story about his time working at a restaurant and could not hold it together, descending into fits of giggles.

https://twitter.com/EffMktHype/status/1456524240425873409

Whipsaw

November 5, 2021

–Sept ’22 Short sterling leapt 28.5 bps yesterday to 9897.5, as the Bank of England left rates unchanged.  The markets had found Carney to be unreliable, and Andrew Bailey is following right along the same path. In the US, it was the forward EDU’23 that was the star performer of the curve, rallying 11.5 to 98.695.  The BOE move (or lack thereof) caused second thoughts about the Fed’s prospects of actual rate hikes.  For example, FFF’2/FFF’3 calendar (Jan’22 to Jan’23 FF spread) had been around 75 bps, indicating 3 hikes over 2022.  Yesterday it fell 6.5 to 67.5.  The curve steepened from 5’s out, as the 5y yield fell 8.3 while the thirty-yr yield eased only 2.7.  While Powell carefully laid a long-term structural foundation of programs and communication to prevent a taper tantrum, other central banks have contributed to whipsaw moves.  It’s worth bearing in mind that we don’t know what the Fed of 2022 is going to look like, as Powell has not yet been re-appointed and political losses by the Dems may spark the Biden administration to employ extra flair in shaping the central bank of the future.  

–Unit labor costs in yesterday’s productivity report were +8.3%.  The last employment cost index number also raised some eyebrows, yet at Wednesday’s presser Powell said that current inflation is not driven by wage gains.  Today features the Employment Report, with NFP expected 450k and yoy Avg Hourly Earnings expected 4.9% from 4.6% last.

–Wow, something new in government: “I went and knocked on doors and I listened to people.  They told me what their problems were and told me what their complaints were and I listened,” said [Edward] Durr, first-time office holder who beat NJ State Senate President.

We need more inflation!

Nov 4, 2021

–The Fed began the process of tapering as the Treasury also announced cuts in auction sizes.  The taper doesn’t cut the size of the Fed’s balance sheet, it simply reduces the pace of growth.   Powell seemed somewhat uneasy in his press conference yesterday, again saying that the case for rate liftoff has not been made according to employment.  He also implicitly made the somewhat tenuous case that inflation is not due to wage gains and is therefore transitory.  Steve Liesman asked a great question about the risk tradeoff between putting 5 million more people to work at the margin versus accelerating inflation, which hurts ALL Americans.  Powell at first attempted to say that we’re not in a Phillip’s Curve situation where there is an actual trade-off, but then noted that there are times of tension between those two goals (of stable inflation and full employment) and it comes down to risk management.  That was Liesman’s question in the first place, are the risks of more inflation affecting everyone becoming greater than adding jobs.  Powell sidestepped it. I would note that at the onset of the last two tightening cycles in 2004 and 2015 or 2016, the unemployment rate was higher than it is now (4.8%) and trended lower as the hiking progressed.  In some ways I think Powell would just like to throw up his hands and say, “Look, the only way out of this mess is to inflate out of it!  THAT’S why we can’t raise rates from zero.”

–Yields rose somewhat on the day, with tens +3.3 bps to 1.58% and the 30yr rising a similar amount to just under 2%.  Eurodollars were down 3.5 to 5.0 from reds to blues.  There was decent put activity in EDM2, most notably a new seller of about 50k 9925p at 5.0.  EDM2 settled 9958 or 42 bps, vs the current libor setting around 13-14 bps.  The market is currently comfortable with the idea that the first hike will come immediately after taper’s end.  The only one-year calendar to post a new high was EDM2/EDM3 which rose 3.5 to 82. Implied vol again eased in treasuries with TY down at 4.3.

Vol implodes in front of today’s FOMC taper announcement

November 3, 2021

–To give an example of vol implosion yesterday, consider EDZ2 9962.5 calls.  On Friday they settled 7.25 vs 9913. On Monday 6.5 vs 9910.  Yesterday morning they were 5.5/6.5 vs Friday’s same futures ref 9913.  And by settlement, as futures had rallied to 9918 they settled 6.0, DOWN 0.5 from Monday with futures UP 8.  The fevered pitch to cover premium broke, as news reports named various hedge funds that had ‘grounded’ traders (and likely covered exposures Friday and Monday).  There was early (new) selling of 25k 2EZ 9862c from 8.5 to 9.0, settled 9.0 even as futures rallied 6.5 to settle 9854.5 (EDZ3).  A red straddle strip, Z2 9900^, H3 9900^, M3 9875^ and U3 9862,5^ settled Monday at 314.  That strip was sold in size of at least 3k down to 285 and settled 295.

–One can conclude that today’s taper announcement by the Fed is expected.  However, there were still a few large put spreads bought, for example 0EX 9912/9900ps 3 paid 25k and 0EX 9900/9893.75ps 1 paid 50k.  These are on EDZ’22 as the underlying, which settled 9918, and expire one week from Friday.  Settles were 2.75 and 0.75.  The question is how Powell will respond to high inflation and high asset prices which threaten both stability and equality goals.  

–Near euro$ calendar spreads receded from recent highs as reds (2nd yr) led the strip higher, closing +8.375.  Blues (4th year) were unchanged on the day and golds (5th year) actually closed down 2.25. 5/30 treasury spread was up 3.7 to end at 81.  Tens fell 2.8 bps in yield to 1.547%.

–When I was on the CME floor and a big data release came out, sometimes there was a huge price gap of maybe 10-12 bps in a given contract that would almost immediately revert.  As a rule, it didn’t take that long to eventually test those extremes again.  I.e, if a market gaps to the downside on unexpected news, it’s because it was unbalanced; there weren’t enough shorts with resting bids to help absorb selling on new information.  Even though the market would bounce, maybe for a week or two, those extreme levels are revisited, because the same imbalance has only been temporarily alleviated.  It was a tough October for longs in the short end of the curve.  For example EDZ2 had a high of 9954.5 on Oct 4 and a low Friday of 9906.  Longs have had faith in the Fed’s jaw-boning about tapering not being related to rate hikes, and inflation simply being related to covid.  We’ll get the same Fed message today, but the market reaction may not be as charitable. 

–Is a sign of the possible broad sentiment change in rate markets is also being reflected politically?  Youngkin win in VA, Minneapolis rejects ‘defund the police’.  

That’s what the world is today

November 2, 2021

–The RBA decided to:

• maintain the cash rate target at 10 basis points and the interest rate on Exchange Settlement balances at zero per cent
• continue to purchase government securities at the rate of $4 billion a week until at least mid February 2022
• discontinue the target of 10 basis points for the April 2024 Australian Government bond.

–Some see the result as less hawkish than expected, but the point is that market forces overwhelmed the target on the Aussie April ’24 note, and related issues are being faced to a greater or lesser degree by many central banks.  A couple of interesting notes from eurodollars:  Yesterday’s three month libor setting was just over 14 bps, having been anchored for some time at 12 to 13.  A week or so ago there was a buyer of 100k EDM2 9981.25/9987.5cs for 1.5.  This libor setting chews into the upper strike, threatening the 6.25 max value.  Of course, this setting may just be end-of-year pressure which recedes by June, or… it may be an initial fissure regarding credit in general.  In any case, EDZ1 9962.5 puts traded at 1.0 yesterday!!  Traded small, but they are 15.5 out of the money with just six weeks to go on the front contract.  That’s a sign of forced buying.  There was also a new buyer of 40k 0EH2 9787.5 puts for 3.5 ref 9890.5 in EDH’23.  So these puts are 100 out of the money with the contract already having fallen 40 bps in the month of October.  It’s not as if every trade is a reach for premium, but there was also buying in 3EZ 9775p for 1.5 and 9800p for 5-5.5 (settled 1.5 and 4.25) with open interest in all 3EZ puts rising 145k. Buying gamma to protect vega (paraphrasing NovaSatus Trading) 

–New highs once again in near euro$ one-yr calendars.  EDZ1/EDZ2 up 1.5 to 68, while the peak 1-yr has moved forward to EDH’22/EDH’23 at 82, up 2 on the day.  Back spreads continue to make new lows.  For example, green to blue pack spread (3rd to 4th year forward) settled at just 11.625.  So front spreads are 7x higher than back spreads.  In short sterling, we’re nearing a one-year calendar of 100 bps as Dec’21/Dec’22 closed at 97, having launched off a September low of 36.  However Dec’23/Dec’24 sterling settled at NEGATIVE 17.

–Virginia governor election today, with possible implications regarding national fiscal stimulus.  (Not really…both parties see spending as a great way to buy votes).  However, Manchin is still holding out on the Biden agenda.  Treasury announced plans yesterday to borrow $1.02 trillion this quarter and $476 billion next quarter.  Mind-boggling numbers.  What does it all boil down to?  Well that’s easy.  $8 wheat.  (High since December 2012). 

“And the band played on.”

• ABOUT:
  Former member of the CME specializing in interest rate options and yield curve strategies.