Jobs now the focus
July 6, 2023
–Vol quite a bit firmer as long end rates move higher. TYU 111.5^ 2’33 or 7.6, high of recent range. 2/10 back to -100 having been -106 last week. New high in SFRZ3/Z4 to -120.5, up 6.5 on the day as Z3 rose 1.5 to 9463.5, while Z4 was -5.0 at 9584.0. The lowest one-year spread has migrated to SFRH4/H5 at -123.0 (up 6 on the day).
–Today’s news includes ADP expected 225k. Jobless Claims 245k. JOLTs 9900k. ISM Services 51.2 from 50.3 last.
–Payrolls on Friday.
–SFRZ3 9425/9400/9375p fly vs 9462.5, 3.25 paid 20k. 6% middle strike…fairly aggressive outlook. Other side: +30k SFRZ3 9437.5/9462.5/9487.5/9512.5 c condor for 6.5 covered 65/65.5, 8d. (6.25s). Minutes indicate probability of more hikes, with FFQ3 at 9472 reflecting about 80% odds of another 25 this month.
–Interesting snippet from Simon White of BBG
It looks good- on paper
July 2, 2023 – Weekly Comment
*************************************************************************************
…as the Crisis mood congeals, people will come to the jarring realization that they have grown helplessly dependent on a teetering edifice of anonymous transactions and paper guarantees. Many Americans won’t know where their savings are, who their employer is, what their pension is, or how their government works. …Debtors won’t know who holds their notes, homeowners who owns their mortgages, and shareholders who runs their equities – and vice versa.
-The Fourth Turning (pg 274)
“Bears make you smart – but bulls make you money,” said BMO Cap Mkts Brian Belski, who recently raised his end-year target to 4550 from 4300. (Tweet by Gunjan Banerji)
[that’s the guy who runs your equities. SPX ended week at 4450]
In Sunday’s FT, Pimco’s Dan Ivascyn said the company is preparing for a “harder landing”.
“The more tightening that people [CBs] feel motivated to do, the more uncertainty around these lags and the greater risk to more extreme economic outlooks,” Ivascyn told the FT, noting that when rates have risen in the past, a lag of five or six quarters for the impact to be felt has been ‘the norm’. The market is “too confident in the quality of central bank decisions.”
************************************************************************
The Supreme Court’s decision that Biden doesn’t unilaterally have to power to forgive student debt was a hot topic last week. Freely extended loans which contributed to runaway tuition at Universities will supposedly now have to be serviced. There’s a lot of whining about unfairness. Many debtors feel that higher education should be free so they shouldn’t have to pay their contractual loans. (And besides, Biden promised!) On the other side many taxpayers ask why THEY should have to shoulder the burden of paying for gender studies classes (valuable though they may be). I think that debt forgiveness on a random and mass scale is damaging in that many families and individuals have scrimped and saved to pay for higher education and now find incentives have been toppled and those that did sacrifice have come to the jarring realization that meeting obligations is a suckers game. But would taxpayers really be harmed if the debt vanished? I personally have little connection or understanding of where my own taxes go. Except for the guys that collect the trash. That one I get. I don’t think my tax bill will immediately increase because some kid’s debt goes away. On the other hand, the US Fed’l government is running massive deficits financed by bond issuance. This debt is easily placed, in part because buyers, domestic and foreign, are confident in US institutional law. If you feel as if we’re in the Fourth Turning, you might have a nagging concern that we’ve reached the “teetering edifice of anonymous transactions and [questionable] paper guarantees.”
This week the US 5y rose 13.3 bps to 4.128% and the 10y 7.3 bps to 3.815%. PCE prices yoy reportedly rose 3.8% with Core 4.6%. So the 5y is above headline but below core, and the ten year is equal to headline.
Are we at restrictive levels? Apparently PIMCO thinks so. It seems a rather stark repudiation when Powell, just this week, repeated that markets have become much faster adjusting to policy, while Ivascyn cites a rule-of-thumb five to six quarters for the economy. Of course, both can be right; markets don’t necessarily reflect the economy at a given point. Let’s say that lags have shortened. Just under a year ago, at the July 27, 2022 FOMC, the Fed raised the FF target to 2.25 to 2.5%. On July 28 PCE prices were +6.8% yoy. Have we felt the full impact of this rate having more than doubled in less than four quarters? In September, when the Fed hiked to 3.0-3.25%, PCE prices were +6.2%. Now FF are 5.0-5.25% and PCE prices are 3.8%. Winning.
In my estimation, the risk is rising that creditors will not be as liberal in extending credit to the US as they’ve recently been. Currently, the US 10y inflation-indexed note yield is around 1.6%, and the ten-year breakeven is about 2.2%. This year the 10y breakeven, which reflects long term inflation expectations, has been between 2.12 and 2.52%. In the past three months the range is just 2.17 to 2.32%. Quite tame. According to the St Louis Fed the peak was 2.98% in April 2022. In 2018 the range from January to mid-Nov was 2.00 to 2.17%, ending the year at 1.71%. Real yields may yet increase.
On the SOFR curve, the weakest contracts this week were SFRM4, down 26.0 to 9524, and SFRU4 down 27.5 to 9563. The May highs in these contracts were 9696 and 9722, so from the May 4 high to Friday M4 is down 172 bps and U4 is down 159. The Fed (helped by data) has been incredibly successful at convincing the market that bank failures were a mere blip on the radar (perhaps analogous to a UFO, but that’s another story) and that the Fed will maintain restraint until inflation hits 2%. Ever since I have been in this business there are intermittent cries that the Fed is risking its credibility. Clearly the Fed has made many mistakes, but in terms of credibility, I know that if the Fed hikes, funding costs increase. Forward rates may go up or down, but if you’re a short term borrower, you feel actual credible pain.
Consider SFRH4, which settled 9488.5 or 5.115%. This contract is 3 to 4 quarters past the last Fed hike which occurred May 3, so you might say it captures the lag. Pre-SVB the low settle was 9480.5 on March 8. The subsequent high print was 9684 on March 24 (~200 higher than now) and the high settle 9653.5 on May 4 (165 higher than Friday’s settle). At 5.115% this contract is above every inflation measure except Core CPI (5.3% last). Headline CPI is 4.0%, Avg Hourly Earnings 4.3%, NY Fed’s Underlying Inflation 3.5%, Atlanta Fed Sticky Prices 4.1%, Friday’s PCE 3.8% and Core 4.6%.
FFQ3 settled 9472 or 5.28%. The Fed Effective had been 5.08% through the first half of June, but 5.07% since June 20. Call it 5.075 or 9492.5. A hike of 25 at the July 26 FOMC would mean 5.325% or 9467.5. Therefore the market is now about 80% sure of a hike. This week brings the employment report with an expected UE rate of 3.7%, NFP 225k and Avg Hourly Earnings 4.2% yoy.
Just a couple of cherry-picked quotes to wind up:
From June 25 FT (credit bubble bulletin)
‘In New York, buildings are selling for less than the value of the land they sit on,’ said Will Silverman, managing director at Eastdil Secured… ‘We are seeing prices lower than they have been in 20 years in absolute dollar terms.’
From June 25 WSJ. [Remember ‘covenant-lite’? Good times… ]
So far this year, companies such as American Airlines and Six Flags have issued $91 billion of speculative-grade bonds, according to PitchBook LCD, up 35% from the year-earlier period… But those bonds look different than during the borrowing boom of recent years. A full 62% of them have been secured—backed by collateral—offering investors greater protections if the company defaults. That is easily the highest percentage in records going back to 2005. The average maturity of the junk debt has also shrunk to 6.1 years, down from an average of 7.4 years over the previous decade…”
The market is too confident in the quality of central bank decisions.
| 6/23/2023 | 6/30/2023 | chg | ||
| UST 2Y | 474.8 | 487.2 | 12.4 | |
| UST 5Y | 399.5 | 412.8 | 13.3 | |
| UST 10Y | 374.2 | 381.5 | 7.3 | |
| UST 30Y | 382.1 | 385.2 | 3.1 | |
| GERM 2Y | 310.6 | 319.6 | 9.0 | |
| GERM 10Y | 235.3 | 239.2 | 3.9 | |
| JPN 30Y | 121.4 | 123.5 | 2.1 | |
| CHINA 10Y | 267.4 | 264.0 | -3.4 | |
| SOFR U3/U4 | -124.0 | -103.0 | 21.0 | |
| SOFR U4/U5 | -73.5 | -83.0 | -9.5 | |
| SOFR U5/U6 | -14.5 | -21.0 | -6.5 | |
| EUR | 108.95 | 109.13 | 0.18 | |
| CRUDE (CLQ3) | 69.16 | 70.64 | 1.48 | |
| SPX | 4348.33 | 4450.38 | 102.05 | 2.3% |
| VIX | 13.44 | 13.59 | 0.15 | |
Finally, an Alan Arkin scene from Little Miss Sunshine
Bear market
June 30, 2023
–US rates jumped yesterday with the 2y yield up 15 bps to 4.872%, and 10s up 13.4 to 3.85%. The final reading of Q1 GDP was 2.0% vs expected 1.4% with a price index of 4.1%. Jobless Claims lower than expected at 239k. August FF settled 9471.5 (-2.0) or 5.285%; a hike of 25 bps at the July 26 FOMC would yield a final settle of 9467 to 68. SFRZ3 settled -12 at 9460.5. That contract has swung from pricing end-of-year easing to hikes just since May. On May 10 the close was 9579.5, so that’s 119 bps in a month and a half. Weakest contracts on the SOFR strip were SFRH’25 and M’25, both plunging 21 bps to 9624.5 and 9638.5. These prices are indicative of lower rates in 2025 of course….but much less lower after yesterday.
–There was a large block trade, sold 67k SFRZ3 vs bot 36.7k FVU3 at 107-135, approx $1.58m DV01. I posted the attached chart SFRZ3/SFRZ5 as a proxy for the spread. At the time Z3/Z5 was printing -202.5 but it came back to settle -194. From this morning’s prelim open interest, the FV part looks new as OI rose 27k, but that’s not certain since TY OI was also up 48k. SFRZ3 open interest was down just 2600 contracts.
–The 30y bond closed at 3.91%, up a little over 10 bps. There are three tops around 4%; a close above 4% would likely see follow-through to test last year’s high of 4.4%
–Thursday was an extremely bearish day in the rates complex. New lows in most contracts punctuating a huge selloff since early May. Vol was higher in treasuries even in front of the holiday weekend; I marked the atm USU straddle at 4’38 from 4’24 Wednesday, from 10.8 to 11.6. Previously, expected rate hikes affected front contracts but back-end yields stayed relatively calm as the curve inverted further. Indeed the curve DID invert further, but the jump in longer dated treasury yields is likely a headwind for stocks.
–Eurozone inflation was 5.5%, but Core stubbornly high at 5.4, up from the last reading of 5.3%.
–Today US releases PCE prices, expected 3.8 to 3.9% from 4.4% last. Core expected 4.7% from 4.7.
25 years of transitory
June 29, 2023
–Central bankers at the ECB conference continued to talk restraint, but SFR futures still closed higher on the day. However, prices have reversed and are near new cycle lows this morning. For example SFRU4 settled 9587, +7.0 but have exactly reversed that move, trading 9580 this morning. With respect to a question on monetary policy lags, BOJ’s Ueda said monetary policy has been easy in Japan for the past 25 years with no inflation. He jokingly added that perhaps the lag time is 25 years. *Nervous laughter from the crowd.
–All 23 banks passed the Fed’s stress tests. It will be interesting to see if the remaining 18 banks all pass next year.
–Final Q1 GDP numbers today. Fed’s preferred inflation data tomorrow, PCE prices. Headline expected 3.8% yoy from 4.4% last with Core unchanged at 4.7% yoy.
–Powell’s focus on Service inflation, which is more labor intensive, suggests that the Fed will continue restraint until unemployment rises appreciably
–This morning’s prelim data still shows that SFRU3 traded a staggering 951k contracts yesterday with a fall in open interest of 26k. The contract settled unchanged at 9463.5. Very odd.
Inversion round trip
June 28, 2023
–I marked 2/10 at -99.4 using the new 2y. However, the old 2y (May ’25) has a yield over 6 bps higher at 4.829% vs new at 4.76%. Using the old 2y yield gives a 2/10 read of -106.3, very close to the pre-SVB low of -109. Attached is a chart of SFRU4/SFRU7 which tracks 2/10 closely. Pre-SVB the low settle was -97.5 and yesterday it was -97. The intervening high was +18 on May 4. That’s quite a round turn of 115 bps in just four months! On the SOFR curve reds were down 11.5bps, greens -8 and blues -4.75. SFRH4 settled 9498.5 or 5.015%, lowest settle since March 8.
–ECB banking forum features Bailey, Lagarde, Powell and Ueda on a panel today which occurs, I believe, at 9:30 EST. Treasury auctions $35b in 7s today.
–Equity indexes ripped higher yesterday, but have given back a little this morning as the US weighs AI chip restrictions to China.
2/10 pressing new lows
June 27, 2023
–Another new low yesterday in 2/10 at futures settle; I marked at -101.6. Attached is a chart showing the 2004/2006 tightening cycle in 2/10 vs current. The 425 bp FF increase in the first episode ended in June’06. The initial low in the spread was in Feb’06 at -16, which was followed by a solid bounce, but the ultimate low was -19 in November. In the next year and a half 2/10 surged to +207 as the GFC took hold (not shown on chart)
In the current example, we’re about 100 bps MORE inverted. The early March low was -109, followed by the SVB bounce, and now retesting lows.
–On the SOFR curve Z3 and H4 were weakest contracts, both settling -1.5 (9477 and 9508). Reds were +4.5 and greens +5.0. The market continues to respect the Fed’s restraint. Stocks sold off in end-of-quarter jockeying.
–Somewhat interesting summary by Gita Gopinath of the IMF at the ECB forum in Sintra. She says 1) sticky prices remain too high and inflation is taking too long to come down, requiring more commitment by CBs 2) Higher rates can create financial stability stresses and CBs are not equipped to handle insolvent borrowers 3) Post-pandemic there are more persistent risks to upside inflation.
[sounds like a recipe for financial crisis]
–5yr auction today. Main event in Sintra is tomorrow but there may be some headlines today. Durable Goods and New Home Sales in US, along with Consumer Confidence, Richmond Fed Mfg and Dallas Services
Heroic Hopes for Ease Vanish
June 25, 2023 – Weekly Comment
***********************************
Did they get you to trade
Your heroes for ghosts?
-Pink Floyd
This week I am just noting a few odds and ends, interesting (to me) as individual snippets, but I am not trying to weave a broader story. I start with a chart of FFQ3 to FFF4. This spread represents hiking/easing prospects over the last half of this year. The next FOMC meeting is July 26 (which directly affects FFQ3; there is no FOMC in August). Then there are meetings Sept 20, Nov 1, and Dec 13 which occur before the January’24 contract.
This spread has rallied from a deeply inverted -76.5 on May 4 (essentially pricing three 25 bp cuts in the last half of the year) to -1.5 on Friday, which indicates that all expectations of ease have been squeezed out. This is exactly Powell’s goal: to convince the market that easing is not forthcoming in the near term. Although the Fed declined to overtly raise the FF target at the last FOMC, this price action IS A HIKE. From May 4 to Friday, FFF4 went from a rate of 4.11% to 5.24%.
This tweet from TO at PNT Options on Friday succinctly captures the dashed hopes of easing in 2023:
HUGE LIQUIDATIONS IN DEC 23 SOFR UPSIDE AS PAPER THROW IN TOWEL ON RATE CUTS THIS YEAR, WHICH IS PUSHING VOLS LOWER
SFRZ3 95.50/96.50 CS SOLD AT 7.5 100k
SFRZ3 96.50/97.50 CS SOLD AT 3.5 70k
SFRZ3 95.75/96.75 CS SOLD AT 6 20k
THIS IS EQUIVALENT OF SELLING 25000 STRADDLES
SFRZ3 9550c settled 14.75 ref 9478.5, open interest fell 87k to 258k. 9650c settled 7.0, open interest rose by 24k to 446k. See other OI changes here:
https://www.cmegroup.com/daily_bulletin/current/Section51_STIR_Call_Options.pdf
While SOFR vol declined, the next chart is somewhat interesting over a longer time frame. It’s the VIX with TY 1m vol over the past five years.
For me, the takeaway is that VIX, at 13.44 on Friday, is essentially down to pre-Covid levels, while TY vol remains substantially higher than 2018/2019 marks, even though it’s near the lows of the past year and a half. I am not suggesting ‘buy vix, sell TY’ here, but I do find it interesting that, with near record inversion of 2yr/10yr spread at -100 bps (4.748%/3.742%), demand for protection on longer dated treasuries remains relatively robust. Of course, with the 10yr yield more than 1.25% below the SOFR (funding) rate, perhaps concern about the possibility of large adjustments is a reasonable risk to hedge. On the other hand, one could say the same for equities.
On that topic, Warren Buffet is known for looking at total market cap as a percentage of GDP. That ratio is currently about 166%. It has declined from a peak of around 200% in October 2021, but is still historically elevated. [link at bottom] I took a look at just the current big 7 tech names as a percent of nominal GDP. Those stocks are AAPL, MSFT, AMZN, GOOGL, META, TSLA, NVDA. At the end of Q3 21, these seven were about 43% of GDP. By the end of Q3 22, they had declined to 31% of GDP and at the end of 2022, to 26%. As of now (using Q1 nominal GDP) the ratio is back over 40%. I’m not drawing conclusions except to say that the dominance of a few large tech stocks being correlated to a decline in VIX makes me inclined to stand aside.
There are several items of note this week. Auctions of $42b 2y on Monday, $43b in 5s on Tuesday and $35b in 7s on Wednesday, along with $22b 2y FRN. Including last week’s 20y, the amount of new cash being raised is >$100b.
On Tuesday and Wednesday, there is a central banking forum in Sintra. Wednesday’s Policy Panel is at 14:30 Sintra time; 9:30 EST. Bailey, Lagarde, Powell and Ueda will be participating, moderated by Sara Eisen. Also on Wednesday, the Fed releases Bank Stress Test results (which don’t seem to have been particularly valuable recently).
https://www.ecb.europa.eu/pub/conferences/html/20230626_ecb_forum_on_central_banking.en.html
On Friday, the PCE Deflator is released, expected yoy 3.8% from 4.4% last. Core expected 4.7% from 4.7%. Regarding inflation, Jim Bianco has noted that base effects will make CPI quite low this month (released July 12) but it may mark the low for the year. From May 2022 to June 2022 the CPI Index went from 281.26 to 294.7, a one-month surge of 1.2%. Due to base effects that number now falls out of the yoy CPI calculation, meaning inflation released on July 12 is only expected to be around 3%. However, due to the same base effects, the comparisons will start getting more difficult as the year progresses. Bianco and others think two more hikes will be completely justified. My bias is that duration is more important than level, and employment data are showing signs of a negative turn. Note that several presentations in Sintra on Tuesday will focus on inflation.
| 6/16/2023 | 6/23/2023 | chg | ||
| UST 2Y | 472.9 | 474.8 | 1.9 | |
| UST 5Y | 400.2 | 399.5 | -0.7 | |
| UST 10Y | 377.3 | 374.2 | -3.1 | |
| UST 30Y | 385.8 | 382.1 | -3.7 | |
| GERM 2Y | 312.3 | 310.6 | -1.7 | |
| GERM 10Y | 247.4 | 235.3 | -12.1 | |
| JPN 30Y | 122.8 | 121.4 | -1.4 | |
| CHINA 10Y | 267.9 | 267.4 | -0.5 | |
| SOFR U3/U4 | -124.0 | -124.0 | 0.0 | |
| SOFR U4/U5 | -70.5 | -73.5 | -3.0 | |
| SOFR U5/U6 | -15.5 | -14.5 | 1.0 | |
| EUR | 109.45 | 108.95 | -0.50 | |
| CRUDE (CLQ3) | 71.93 | 69.16 | -2.77 | |
| SPX | 4409.59 | 4348.33 | -61.26 | -1.4% |
| VIX | 13.54 | 13.44 | -0.10 | |
https://www.gurufocus.com/stock-market-valuations.php
Level and duration of 2/10 inversion nearing extremes
June 23, 2023
–The 2/10 treasury spread was trading -100 yesterday, extreme inversion. 5/30 also ended at a new recent low of -17 bps. The pre-SVB low in March in 5/30 was -46, so we’re still well above that level. However, the early March low in 2/10 is -109. 2/10 has been inverted, (below -15), since July 2022. One year is about the maximum for inversion for last few episodes.
–On the SOFR curve SFRU3/U4 closed at a new recent high of -118 as reds took the brunt of the selling following Powell’s repeated assertions that no ease is forthcoming and that there will likely be a couple of more hikes this year. (Does this rhyme slightly with, “We’re nowhere near neutral” in October 2018? Stocks slid 20% after that). SFRU3 settled 9864.5 or 5.355% which is consistent with at least one more 25 bp hike by Sept. SFRU4 settled 9582.5 or 4.175%. SFRZ4 settled 9615 or 3.85%, the lowest settle in terms of price since SVB; the low settle in that contract in early March was 9596.5.
–Bank of England surprised with a 50 bp zinger, and SFIU3/SFIU4 went from -3.5 settle Wednesday to -27.5 (obviously the market was looking for 25). This has been an extremely volatile spread. In mid-May it was -90, only to rally to +13 by June 19, down to -3.5 by Wednesday and -27.5 Thursday (9411.0/9438.5).
–New high $/yen yesterday at 143.18, the high print last year is 151.95. EUR/JPY is 156.88, the highest since 2008 when it reached 169.96. BOJ going to do anything about it? There are a lot of carry trades based on yen rates.
–BBG leads off today with ‘The World’s Empty Office Building Have Become a Debt Time Bomb’. Subtle. On twitter I saw this snippet yesterday, “…4.55% of auto loans for people ages 18-29 are 90+ days delinquent – the largest percentage of late auto loan payments since 2009.”
–Sen Warren harangued Powell to take full responsibility for banking problems yesterday. She sits on Subcommittees on Financial Institutions, and Securities, Insurance and Investment, and Chairs the Econ Policy Committee. Hey Elizabeth, do YOU have a certain responsibility to oversee banking issues? Or does it serve the country better to just blame Powell? Gov’t at work…
Some inflation risks remain…
June 22, 2023
–Powell again today in front of Senate. Rates were little changed on the first day of Powell’s testimony, though there seemed to have been some coaching on [RISKY] changes in bank capital rules before the event. The ten year yield ended unchanged at 3.723% after a stellar 20-yr auction (4.01% vs pre-auction 4.027; bid/cover 2.87). Front SOFR contracts were slightly negative with SFRU3 -1 at 9466 and SFRZ3 -1.5 at 9479, as Powell maintained that further tightening is likely. Open interest fell in both contracts, -30k and -22k, so it felt like a bit of long liquidation. However, there was a new buyer of 50k (OI +36k) SFRU3 9450/9437.5/9425p fly for 2.25 to 2.5, settled 2.25. The middle strike objective is 5.625% or 54.5 bps above current EFFR of 5.08, so someone is taking the Fed dots at face value. That ALWAYS works, right?
–Another interesting SOFR option trade: buyer of 13k SFRU5 9750c for 45.0 and 12k SFRZ5 9750c for 48.0. These are long-dated green options with a 2.5% strike; long greens rarely trade. SFRU5 settled 9669.5, calls settled 44.25 with 814 days to go, while SFRZ5 settled 9675.5, calls settled 46.75, 905 dte. Deltas around 30.
–Slight new low in 5/30 spread at -14.7. There have been some long curve trades going through; if this spread can hold another day of Powell it’s likely worth taking a shot at the long side.
–Attached is chart of BBG Agricultural Index (BCOMAG). Nice upside breakout yesterday as grains exploded higher. Dec Corn +31 ¼ to 628 ¼ while Sept Wheat soared 39 ½ to 748 ¼ . I suppose there’s a possible small inflationary impact if this run were to take out last year’s highs.
Powell in the House
June 21, 2023
–Powell today in semi-annual testimony before the House. The objective continues to be convincing the market that an ease is not in near term prospects. However, yields eased yesterday with tens down 5 bps (from Friday) at 3.723%. FFQ3 settled 9473.5 or 5.265% while FFF4 settled -2 at 5.22% vs the current EFFR of 5.08%, so Fed restraint is being priced through year-end. However, FFF5 settled 9622 or 3.78%, up 3.5. More hawkish Fed talk may have a negative impact on stocks, but SOFR pricing tends to reflect a “more tightening now means more easing later” mindset.
–The Monetary Policy Report was released Friday
https://www.federalreserve.gov/monetarypolicy/publications/mpr_default.htm
–Links to testimony in advance of Jefferson and Cook nomination hearings were posted yesterday. From Jefferson: “Inflation has started to abate, and I remain focused on returning it to our 2% target. Despite recent stress, the US banking system is sound and resilient, and I remain attuned to any threats to its stability.” From Cook: “…elevated inflation is a grave threat to sustaining the expansion of the American economy. Therefore, in my role as a voting member on the Federal Open Market Committee (FOMC), I have been consistently supportive of our rapid and forceful actions to tighten monetary policy and bring inflation down. If confirmed, I will stay focused on inflation until our job is done”.
–Call buying continues, though yesterday a purchase of SFRU3 9550c for 5.5 (settled 5.0 ref 9467) was a short cover. I have added a chart of SFRZ3 9650 c which were heavily bought last week. Open interest went from 314k on June 12 to 435k coming into yesterday. That’s the most OI of any call or put in SOFR, settled 7.75 ref 9480.5. However, SFRZ3 9500p , which are 19.5 in-the-money with -0.59 delta, have 409k open, settled 44.75. In terms of risk reversals, SFRZ3 9425p, 55.5 out-of-the-money settled 7.75 with -0.20d, while the 9537.5c, 57 out, settled over 2x higher at 18.0 with +0.29d.
