Dead money
April 26, 2023
–FRC was cut in half (again) yesterday, and now asset sales are going to occur. I guess the $30 billion in “UNINSURED” deposits by JPM, BofA et al, wasn’t enough. The problem of course, is that banks now have to PAY for deposits, unless they are TBTF, in which case depositors forego income for safety. Market cap of FRC is less than $3b. JPM has $5b on deposit. Let the shares go down another 50% or so, and then JPM or someone else will buy it for $1. Then JPM can unload the crap, thereby frontrunning Blackstone’s “orderly” disposition of the FDICs basket of sh-t inherited from SVB. The problem is further illuminated by this headline on BBG: “Carvana was built for low interest rates. Can it survive its $8 billion debt?” Spoiler: NO.
–A LOT of relatively new companies were BUILT for low rates. Loans outstanding to these companies are dead money. It’s all fine, if funded near zero, but it’s been a tough year. If loans to the TREASURY soured as low cost funding ended, then what do you think money lent to NEW CONCEPTS is? Dead, that’s what. So now comes the time to quantify how much of a hike the credit crunch will equate to. I have seen an estimate of 50 bps, maybe more. Well if it’s 50 bps, then FF PLUS the credit crunch premium is sufficiently restrictive relative to inflation to continue to slow things down. MSFT and GOOGL earnings have sparked a temporary reprieve in ESM overnight, but perhaps these results also showcase that the spoils are going to the big companies/banks, and the “little guy” that everyone claims to care about is out-of-luck. Or something like that.
–Huge rally in rate futures yesterday. SFRM4 was the leader, up 27.5 to 9669.5 or 3.305%. New lows in the near 1-yr calendars. SFRM3/SFRM4 is now the most inverted at -169.5 (9500/9669.5), while U3/U4 is -168.5 (9531.5/9700). So the lowest spread has moved to the front slot because the market perceives a sh-t show more rapidly. Vol exploded for the same reason. On Friday the atm SFRZ3 9550^ was 103, and yesterday the new atm 9575^ settled 118! That’s moving higher on the panic meter, though VIX barely budged at 18.77.
–How’s the Fed left for May 3 FOMC? The market is still pretty sure, though obviously less sure, that another 25 bp hike is coming. FFK3 sttled 9499.5, 70-75% odds of a 25 bp hike. But the October’23 contract (FFV3) was up 15 yesterday to 9520.5. Current EFFR is 483 or 9517. So a hike next week and an ease at the Sept 20 FOMC. Makes about as much sense as anything else going on in this world.
–Durable Goods and 5y auction today.
Walking into recession
April 25, 2023
–SFRH4 9600 straddle settled 129.0 vs 126.25 on Friday. SFRZ3 9550^ settled 106.5 vs 103. Good early buying of SFRZ3 9700c, 19.5 paid for about 10k, delta 22 vs 9553.0 down to 51.5. Settled 19.75 vs 9552.5. After Friday’s 50k buy of SFRZ3 9600/9650/9700/9750 call condor, about 10-15k added yesterday; settled 5.25. PNT options’ TO notes, “Implied vols have grinded higher as Macro Funds have continued to unwind short vol positions.” On 4/19, the atm Z3 9537.5^ was 99.
–New recent low in SFRU3/U4 at -158.5 (9514.5/9673.0) down 4 on the day. The lowest settle for U3/U4, which is also the low for any one-year calendar in the cycle, has been -177, set in January. In my opinion, technical factors like rising vol, a more inverted front end, and an increase in open interest (SOFR +88k yesterday) suggest a move toward lower rates in the front end.
–In fundamental news, Dallas Fed Mfg -23.4 yesterday, essentially equaling the 2022 low of -23.7. Outside of Covid these are the lowest levels since early 2016. Philly Fed Mfg last week moved down to -31, the low since May 2020. “Every time this indicator was at or below current levels the US economy was either in or approaching a recession.” Yesterday a guest on Maria Bartiromo show noted that Leading Indicators have dropped every month for a year, also a harbinger for recession. From a WSJ article on Comm Real Estate: “Office building prices are down 25% since early 2022, estimates real-estate analytics firm Green Street. Prices of malls are down 19% since early 2022, and down 44% since 2016.”
–Today’s news includes Philly Fed non-mfg. New Home sales expected 632k. Consumer Confidence expected 104.0. Auction of $42b 2y notes. Still in the midst of the biggest week for earnings releases, GOOGL today.
Slow trade
April 24, 2023
–On Thursday TYM settled 114-21, on Friday 114-15, with the ten-yr yield up 2.7 bps to 3.572, and this morning we’re right back to Thursday’s level at 114-225. Trade is lackluster. Chicago Fed’s National Activity last at -0.19, and Dallas Fed’s Mfg last at -15.7.
–On Friday, SFRH4 9600^ settled 126.25 ref 9594.5. The previous Friday 4/16, it settled 120.25 ref 9604.5. Short end vol firmed Friday, perhaps partially due to concern about the debt ceiling. Of course, current levels are much lower than the surge seen in mid-March related to banking failures. For example, on March 17, SFRH4 settled 9643 and the 9637.5^ settled 157.25.
–May FF settled 9496.5, indicating high probability of a 25 bp hike at the May 3 FOMC. However, FFK4 is 109 bps lower in yield at 9605.5. On the SOFR curve SFRU3/U4 is the most inverted at -154.5 (9512.0/9666.5), which is the low for any one-year calendar since the March banking turmoil. The low for the cycle of any one-year calendar has been -177 in January.
What if the Fed hikes, but debt-limit issues spark a stock sell-off
April 23, 2023
With every mistake, we must surely be learning
Still my guitar gently weeps.
-The Beatles, 1968 White Album
The thirty year bond range on the year is 3.54%, the low on Jan 18, to 399.5% for a high on March 2. Friday I marked the 30y yield at 3.776%, essentially right in the middle of the year’s range. No particular edge at this location. The range in tens is 3.37% in Jan to 4.06% on March 2, with Friday’s close nearer the low end at 3.572%. The five year low to high is 3.376% (just after SVB) to 4.35% on March 8. Last is 3.665%. In the month of March, 5/30 made the entire range for the year so far: -45.8 on March 8 to +25.5 on March 23. Current is +11. Looking at the back end of the SOFR curve, the low price (high yield) for the June’26 one-yr pack was 9649 on March 2 (3.51%) and the June’27 pack low on March 2 was 9647 (3.53%). Friday’s settles were 9696.75 and 9685.875. (A pack is the average of the four contract prices).
With stronger than expected data in February, starting with the booming NFP (472k) on Feb 3, rates soared higher going into the beginning of March, but back-month SOFR contracts never rose above levels that would be consistent with 3.25-3.50% FF target. Current levels are consistent with 3%. The market has consistently associated near-term tightening with conditions that will lead to lower rates in a couple of years.
At the very front end of the market, FFK3 settled 9496.5 on Friday, pricing near certainty of a 25 bp hike at the May 3 FOMC. FFM3 settled 9491.0 or 5.09%, essentially right at what should be the new Fed Effective of 5.08%. On Friday, PCE prices are released, with the headline number expected 4.1% from 5.0% last and Core expected 4.5% vs 4.6% last. If headline yoy is 4.1% and the Fed hikes on May 3, then the Fed Effective will be approximately 1% higher than inflation.
The market clearly perceives the next hike as being the last one, with a small chance of another hike at the June 14 meeting. Again, the more important quality for Fed policy going forward is to try to convince investors that a pivot will NOT come this year. FFF4 settled Friday at 9541.5 or 4.585% essentially ½% below what will likely be the Fed Effective as of May 4. What is interesting about the FFF4 contract is that it traded just over 5.5% at the start of March with a low of 9444, and traded just under 3.5% on the SVB turmoil, notching a high of 9663.5 on March 15.
My personal feeling is that the Fed gains nothing by hiking at the May meeting, and rather should hold fire, but strongly emphasize the threat of additional rates hike over subsequent meetings. One consideration may be that the critical debt ceiling date has been moved forward to June as tax collections were not as robust as expected.
The Market Huddle podcast (Kevin Muir and Patrick Ceresna) had a guest named Vincent Deluard from StoneX Group this weekend. One important topic was the Treasury General Account (TGA) and how it is currently extremely low at about $160 billion due to the debt-ceiling impasse. Deluard noted that there’s an inverse relation between the TGA and stocks, saying that the re-build of TGA in early 2022 was very well correlated with the decline in stocks, and that when the government DOES replenish the TGA, it tends to suck liquidity from markets, especially the higher risk categories.
Deluard said the TGA normally has enough for about one month of expenditures, but currently has less than two weeks as a balance. Not only that, but of course the deficit continues to grow, expected to be about $630 billion this year.
Imagine this scenario: Economic data this week comes in about as expected. On May 3 the Fed hikes, but the debt ceiling impasse becomes more and more contentious as the deadline moves ever closer. For evidence that this is already occurring to a degree, note that US 5y CDS went to 53 bps at the end of last week, the highest since 2012. Implied vol in near SOFR contracts had declined as banking problems appear to have abated, but vols firmed into the end of the week, another small sign of uncertainty.
Imagine that this week’s auctions of 2, 5 and 7 year notes don’t go as well as expected due to issues having to do with the debt-limit. The market realizes that the TGA will need to be built up rapidly and, as a result, stocks encounter a hard sell off.
If this type of action should unfold, the blame will of course go directly to the Fed for over-tightening. The easing narrative will thus be brought forward, and it will become even more difficult for Powell to lean against a pivot. A pause in May could forestall the criticism.
If the Fed pauses, then further steepening of 5/30 could result. The thirty-year bond yield could easily approach the upper end of the year’s range at 4%.
Below are charts: The top one is SPX in blue, the TGA in white (last at $167b), and M2 yoy percent change in green. Note that the CBO projects 2023 Fed’l Gov’t outlays at $6.2 trillion, approximately $500 billion per month and 23.7% of GDP.
The second chart is US 5yr CDS.
| 4/14/2023 | 4/21/2023 | chg | ||
| UST 2Y | 409.0 | 418.8 | 9.8 | wi 414.5/413.5 |
| UST 5Y | 360.4 | 366.5 | 6.1 | wi 365.5/365.0 |
| UST 10Y | 351.7 | 357.2 | 5.5 | |
| UST 30Y | 373.6 | 377.6 | 4.0 | |
| GERM 2Y | 288.1 | 292.0 | 3.9 | |
| GERM 10Y | 244.0 | 248.1 | 4.1 | |
| JPN 30Y | 130.0 | 134.1 | 4.1 | |
| CHINA 10Y | 283.0 | 282.9 | -0.1 | |
| SOFR M3/M4 | -148.0 | -145.0 | 3.0 | |
| SOFR M4/M5 | -56.5 | -62.5 | -6.0 | |
| SOFR M5/M6 | -2.0 | -2.0 | 0.0 | |
| EUR | 109.97 | 109.92 | -0.05 | |
| CRUDE (CLM3) | 82.43 | 77.87 | -4.56 | |
| SPX | 4137.64 | 4133.52 | -4.12 | -0.1% |
| VIX | 17.07 | 16.77 | -0.30 | |
https://www.cbo.gov/publication/58946
Market Huddle
When there were journalistic standards
April 20, 2023
–Markets just weren’t that interesting yesterday. So I have taken the liberty of attaching an old news story below, which can probably be considered in some way relevant to the business of futures and options.
–If there is something worth mention in yesterday’s activity, it’s that SFRM’24 and U’24 continue to be the weakest contracts, both settling -9 yesterday. Last Thursday M4 settled 9659, and yesterday at 9622, a slide of 37 bps in 4 sessions. U4 went from 9688.5 to to 9652.5, so 36 bps. The ten year yield rose 3.5 yesterday to 3.595%. New recent low in 2/10 at -66. On the SOFR curve all one-year calendars from H4/H5 back made new recent lows. Red/green pack spread settled just under -36 down 4.625 on the day. New buyer of 30k SFRN3 9450/9425ps for 2.0; settled there ref SFRU3 9508.5. New buyer 28k 0QU3 9600/9575ps for 7.25, settled 7.0 ref SFRU4 9652.5.
–Stock futures making new lows on the week with ESM -30 currently at 4148.50.
–If I were the Fed, I would NOT hike in May, even though the market is currently providing a nearly free pass. Signs of economic weakness are becoming more prevalent and tightened credit conditions have yet to work through the system. Rather than face criticism for tipping the economy into inevitable recession and be forced into rapid easing, the Fed should HOLD rates but continue to jawbone for hiking in the future. It might be the difference between being able to keep rates relatively high throughout 2023 versus being forced into cutting.
..
Global fragmentation risks higher prices: Lagarde
April 19, 2023
–We’re now two weeks from the FOMC, and the Beige Book is released today. Also on tap is the $12b 20y auction; late wi was 3.90/3.895.
–Not much change in rates, but the curve became slightly more inverted. For example red to green pack in SOFR (2nd to 3rd year) settled -31.5, a new 20 session low. However, on March 8. the red/green pack spread (using H4 as the first red) settled at a historic inversion of -91.5. It nearly went positive after SVB.
Just looking at JUNE prices on the SOFR curve as of yesterday’s settle:
SFRM3 9491.5 or 5.085
SFRM4 9631.0 or 4.690 (yield is 39.5 lower than June’23)
SFRM5 9693.5 or 3.065 (yield is 62.5 lower than June’24)
SFRM6 9698.0 or 3.020 (yield is 4.5 lower than June’25)
The difference between June’23 and June’25 is over 200 bps (of expected easing).
–Big speech by Christine Lagarde on Monday, talking about global fragmentation and supply shocks, and currencies. Worth a read:
https://www.ecb.europa.eu/press/key/date/2023/html/ecb.sp230417~9f8d34fbd6.en.html
We are witnessing a fragmentation of the global economy into competing blocs…
But that period of relative stability may now be giving way to one of lasting instability resulting in lower growth, higher costs and more uncertain trade partnerships. Instead of more elastic global supply, we could face the risk of repeated supply shocks.
Today the United States is completely dependent on imports for at least 14 critical minerals. And Europe depends on China for 98% of its rare earth supply.
I think her subliminal message is: BUY GOLD!
Dismissing credit concerns
April 18. 2023
–Another weak day in interest rate futures. Red pack (SFRM4 thru H5) again led the way, settling down 11.75 on the day. On Thursday April 13, SFRM4 settled 9659.0. Yesterday it settled -12.0 at 9632.5, and is therefore down 26.5 in two sessions. SFRU4 was actually the weakest contract yesterday, settling -12.5 at 9662.0. The most inverted one-yr calendar is SFRU3/U4 at -146; last Thursday it was -151.0. Projected easing is still being fairly aggressively priced, even with the sell-off. The ten-yr yield rose 7 bps yesterday to 3.587%. 2/10 is -60. China’s better than expected 4.5% Q1 GDP is helping stocks this morning.
–There are many indications that bank failures are being dismissed as a “one-off”. VIX closed 16.95, lowest since the start of 2022. Some of the weakest financial names sported strong reversals off the lows. For example, Schwab was up nearly 4% on solid volume with an outside range day. However, ytd losses for the regional banks are still rather severe as the table below indicates (I pulled it yesterday morning, so probably as of Friday’s closes). Of the 19 worst performers in the S&P, 12 on that list are either financials or insurance. The flight-to-quality bid in treasuries has surrendered. However, I think there’s another way to look at it, which is that the Federal Gov’t is trying to prop up the regional financials, in the same sort of way that the SPR was drained to keep gas prices low. Confidence in the treasury market is, perhaps, eroding as the Federal Gov’t spends resources as if the well is bottomless. Is that a reasonable thesis for stocks maintaining a supported bid, while bonds stumble? Wednesday, the red-headed stepchild 20y bond is auctioned. We’ll see what sort of demand there is.
–If, and of course it’s just a hunch, the treasury market is vulnerable, then perhaps the Fed feels compelled to be more aggressive in terms of its own credibility. Not sure, but FFM3 settled 9492.0 or 5.08%. If the Fed hikes 25 in May, then the new EFFR will be exactly 508. FFK3 settled 9497.5 so the May hike isn’t completely priced, but it’s getting darn close.
–From a YahooFinance story:
Houston and Dallas had 18.8% and 17.2% of office space sitting empty at the end of 2022, according to the figures from CoStar and JPMorgan, well above the national average of 12.5%. New York, San Jose, San Francisco, and Chicago had vacancy rates of 12.3%, 12%, 16.4%, and 15.1%, respectively.
The article notes that excess space was built in the era of low rates; Houston alone has $1b of CMBS due this year.
https://finance.yahoo.com/news/houston-dallas-lead-the-country-in-office-attendance–and-empty-office-space-125019682.html
Higher yields to end last week
April 17, 2023
–Friday featured higher yields across the board; slight bear flattener. On the SOFR curve, whites -13.75, reds -13.375, greens -10.625, blues, -9.0 (Note I consider reds to be M4 thru H5; I think BBG has changed it). In treasuries, 2s +12.4 bps to 4.099% and tens +6.5 to 3.517%. Retail Sales were weaker than expected, but selling ensued, a sign of underlying bearishness.
–From Waller’s speech Friday:
Another implication from my outlook and the slow progress lately is that, as of now, monetary policy will need to remain tight for a substantial period of time, and longer than markets anticipate. But there are still more than two weeks until the next FOMC meeting, and I stand ready to adjust my stance based on what we learn about the economy, including about lending conditions
–A couple of larger trades: SFRH4 9606.25 straddle sold from 123 down to 120.5, total 12.5k, new. Settled 121.25 vs 9604.5. Buyer (new) of 50k TYM3 115/116cs for 26. Settled 24 vs 114-275. Ten year note futures saw open interest rise 46k contracts, an increase of ~ 1%.
Chart is Loans & Leases. Still a healthy yoy increase at 9.5%, but the trajectory has changed.
DIXI
April 16, 2023 -Weekly note
I wasn’t going to write anything this weekend, but I made a few notes, and thought I would just put out a couple of abbreviated bullet points.
However, I got a call Friday afternoon from a friend from the old CME floor who informed me that James Dean passed away (acronym DIXI). His obituary, linked below, has this brief line:
Jim became a member of the Chicago Mercantile Exchange in 1977 and was a legendary trader in the Euro Dollar pit.
So, I am just noting a couple of brief market points and then add a little story about DIXI. Maybe it’s fitting that he passed at the same time the Eurodollar contract did.
Yields backed up significantly this week despite good inflation data. YOY CPI was 5.0% from 6.0% the previous month. Core was still 5.6%, but PPI was 2.7% yoy from 4.6% last. Auctions and a generally weak USD appeared to weigh on treasuries, with tens up 19 bps on the week to 3.517%. The safe haven bid from last month’s banking failures reversed as many officials downplayed risks to deposits and to the banking system in general. However, KRE, the regional banking ETF is reflecting a different story.
As Bluto Blutarsky says in Animal House, “Did you say ‘over’? Nothing is over until we decide it is…” Just because issues are transferred to the FHLB, doesn’t mean the system is in the pink of health.
A tweet from Charlie Bilello:
US Asking Rents are lower than they were a year ago, the first YoY decline since March 2020.
https://twitter.com/charliebilello/status/1646867406306922497
WASHINGTON, April 15 (Reuters) – U.S. Treasury Secretary Janet Yellen said banks are likely to become more cautious and may tighten lending further in the wake of recent bank failures, possibly negating the need for further Federal Reserve interest rate hikes.
Are hikes over? FFK3 traded as low as 9497 on Friday, before settling 9498.5. I calculate 9494.6 as the final FFK price on a 25 bp hike on May 3. Obviously the market still thinks a 25 bp hike is on the way, leaning more toward Waller than Goolsbee and Yellen. In any case, FFF4 settled at 9551.5 or 4.485%, projecting eases into the end of this year.
VIX ended the week at the low of this calendar year 17.07, while MOVE is back to levels from January at 118.8, having surged to 198 in March.
DIXI
I was working on the floor of the CME for Commerzbank at the time as a desk broker. My booth was on the aisle right in front of the pit, in what we used to call the 3rd and 4th options. Desk booths tiered up from either side of the pit, like stadium seating. The first 4 quarterly contracts at that time comprised the bulk of the Eurodollar complex.
Let’s say it’s December 1997. The first contract would be March of 1998. That “front contract” had its own pit. The next contract would be June 1998, and that too, had its own part of the pit. In actuality, the Eurodollar pit was pretty much a huge rectangle, with a section on one end for the first contract, then the next contract, then the next two (the 3rd and 4th options) and then everything else further out… the back months, reds, greens, blues, etc. The back month contracts were physically built up; tiered higher, which allowed for sight lines to the desks and to the other contracts. The 3rd and 4th contracts were also tiered just slightly higher than the front two contracts. At every juncture of the pit locations, spread clerks would stand. Everything was about sight lines and location.
Anyway, this was the period of 1998 and 1999, in a rate hike environment. I will go into details about the economic landscape at another time, but for now I just want to mention a particular trader, Jim Dean, whose acronym was DIXI. He was a sizable trader. He would trade both in the pit, and occasionally would walk out of the pit and start flashing orders in; I mostly just saw him spreading the first four quarterlies.
At the time I would guess that he was late forties, perhaps slightly older. If you saw him on the street, you might mistake him for…hmmm, for what? Just an ordinary Joe. Slender, average height, wire rim glasses. As a rule, his pants were always just a bit too short. Wore track shoes. But what set this guy apart in terms of appearance was his hair, always meticulously in place, and in the restroom he was very careful about neatly combing his sandy hair before he left. And indeed, he was one of those guys that would pull out his comb anywhere on the floor if he felt something was out of place. Here’s the picture: track shoes, flood-length khakis, some sort of non-descript plaid shirt under his trading jacket, not a hair out of place. Go figure.
Anyway, at the time he was trading in 500 lot to 2000 lot clips, or at least that’s what I saw. Those were large orders. We were in the midst of a Fed that was tightening. At the time (and of course it still happens now, in the current environment) a particular contract would gap down several ticks, and these were full basis points. So it might be 44 bid, trade a couple of hundred at 43 and then just go offered at 42 without much trade. Remember, this was before the advent of electronic trading. Things were much ‘gappier’ then.
So, DIXI used to stand in the pit, and then might come out and stand right by me at my desk, as you could easily flash orders to all four contracts from that location.
Now, the other somewhat eccentric thing about DIXI was that he had a calculator, one of those little hand-held ones with the solar panel in the corner, and he would take it out of his trading jacket pocket every now and then to either sum his position or do some other type of calculation. He would actually take it out of his pocket and raise it over his head toward the ceiling, I guess to capture the floor lights to power it. It was almost like a comical religious gesture, ridiculously lifting this calculator towards the lights.
He was standing next to me one day in a fairly active market. He had just been trading in the pit and was now standing outside to trade more. As I said, the third and fourth option pit was slightly elevated, so a trader standing in the pit couldn’t see DIXI, but of course the clerks on the perimeter could. Remember, there are hundreds of people in the euro$ complex. And if a pit filling broker like Mike Murphy (MMF) was getting an order to sell 2000, the pit wouldn’t instantly know that was DIXI, it could have come off a desk for Goldman or Citi, etc. If the pit immediately knows it’s DIXI, it’s not the same as if huge orders are coming off the Goldman desk, because Goldman might KNOW SOMETHING. So, here’s DIXI standing next to me, the pit clerk is indicating that 44’s are trading in EDU, DIXI flashes an order to sell 2000, he immediately gets some type of partial fill, maybe 300 and moves his order down to 43, while flashing other orders into the March pit (bidding); sells another 400 or so in Sept, and then moves down to 42 and gets filled on the balance and flashes in to sell another 2000 at 42, which then goes immediately offered and starts trading 41. The pit clerks are noticeably flustered because they’re trying to make sure of the count/prices. And he just looks at me and says, “I don’t want to even give them a chance to breathe.”
So here’s a guy that probably made $200k in those few minutes, pulling out his calculator and holding it towards the fluorescent lights to make his calculations, with his perfectly combed hair and short pants, and I’m thinking, hey DIXI, how about spending $5 and just buy a f-cking calculator with a battery. Yes. He was a legend.
| 4/6/2023 | 4/14/2023 | chg | ||
| UST 2Y | 382.1 | 409.0 | 26.9 | |
| UST 5Y | 336.2 | 360.4 | 24.2 | |
| UST 10Y | 332.5 | 351.7 | 19.2 | |
| UST 30Y | 354.5 | 373.6 | 19.1 | |
| GERM 2Y | 255.4 | 288.1 | 32.7 | |
| GERM 10Y | 218.3 | 244.0 | 25.7 | |
| JPN 30Y | 130.0 | 130.0 | 0.0 | |
| CHINA 10Y | 286.4 | 283.0 | -3.4 | |
| SOFR M3/M4 | -158.5 | -148.0 | 10.5 | |
| SOFR M4/M5 | -53.0 | -56.5 | -3.5 | |
| SOFR M5/M6 | 1.5 | -2.0 | -3.5 | |
| EUR | 109.22 | 109.97 | 0.75 | |
| CRUDE (CLK3) | 80.70 | 82.43 | 1.73 | |
| SPX | 4105.02 | 4137.64 | 32.62 | 0.8% |
| VIX | 18.40 | 17.07 | -1.33 | |
Might be the most awesome mustache ever
April 14, 2023
–PPI much lower than expected -0.5 m/m and 2.7% y/y. However, rate futures were quiet; expectations of future Fed activity saw little change in terms of price. Ten year yield was +3.3 to 3.452%. SOFR contracts unch to -5 out to blues. Treasury vol continues to ease. Not much news out over the next week. Philly Fed on Thursday. April SOFR options expire today.
–Retail sales today expected -0.4%. Credit and debit card usage has apparently been sliding. Goolsbee appearing on Squawkbox, followed by Waller speaking on the economy. Bank earnings released post-close: JPM, C, PNC, WFC.
–Consider the settle in FFQ3 at 9513.0. EFFR has been 4.83, and April FFs are right there, settling at 9517.25. So with FFQ3 9513, one could say that nothing is expected out of the Fed for the next three FOMC meetings which occur May 3, June 14, July 26. However, there are healthy odds of a 25 bp hike occurring in May or June, as FFM3 settled 9499.5 or 5.005%. The hike, then ease, scenario is rather tightly compressed. FFF4 settled 9567.5, a yield 50 bps lower than the current EFFR. No matter what Fed officials say, the market is convinced that easing begins at some time this year.
–Given the near term uncertainty, condors to peg the SFRM3 settle when options expire on 16-June are relatively cheap. Buyers yesterday:
40k SFRM3 95.125/95.0625/95.00/94.9375 put condor at 1.0 (settle 1.0 ref 9607)
60k SFRM3 95.1875/95.125/95.0625/95.00 put condor at 0.75 (settle 0.5)
So that leaves 9518.75/9512.5/9500.0/9493.75 condor settling at 1.25, with a max gain of 5.0 (6.25 less 1.25 paid) between 9512.5 and 9500. The June FOMC is 2 days prior to option expiry
