That’s what this starship is all about

October 14, 2021

 “Risk is our business! That’s what this starship is all about. It’s why we’re aboard her!”-Captain Kirk

  –There was some risk evident on the USS Eurodollar curve yesterday.  It was as if Starfleet Command had announced a rate hike that would put a stake in the heart of forward economic growth prospects.  The curve flattened pretty massively.  Reds (2nd year forward) were DOWN 5.125 bps and Golds (5th year) were UP 5.375.  A move of 10.5 bps in this spread is unusual, especially when prices move in opposite directions.   EDZ’24 was the pivot, closing at 9932.0 up just 0.5 on the day.  Front one-year eurodollar calendars made new highs; the peak is still EDU’22/EDU’23 which posted a new high settle of any 1-yr for this year at 80.5.  Blues to golds (4th to 5th year contracts) made new recent lows.  As an example, EDU’23/EDU’24 closed at 38 less than half of the spread the year before.  EDZ’22 traded as low as 9933 yesterday, fully 25 bps below where it was on Sept 21, the day prior to the last FOMC. EDZ2 settle of 9937 is consistent with the idea of nearly two hikes by the end of next year.

–This occurred against a backdrop of 5.4% CPI, the annualized high since the peak in 2008 of 5.6%.  On a related note, the Social Security Admin has this note posted on the website: “Social Security and SSI benefits for approximately 70 million Americans will increase 5.9% in 2022.”  On my antenna TV, Amazon, McDonalds and FourWinds Casinos are constantly running ads for workers, highlighting strong wages and benefits.  

–In treasuries, the two year yield was up 2 bps and thirties fell 6.2 to 2.045%.  5/30 ended at 96, the low of this year, but only about halfway back from the mid 2018 low of 19 to the Q1 high of this year of 163.  50% is 91.  The aforementioned red/gold pack spread at 98.5 is similarly close to the halfway back point of 2018 low (-6) to 2021 high (182) around 94.  
–From the IMF Global summary yesterday, there’s this edict: 
“Central banks will need to provide clear guidance about their future approach to monetary policy, aiming to avoid an unwarranted or abrupt tightening of financial conditions. Monetary authorities should remain vigilant, and if price pressures turn out to be more persistent than anticipated, act decisively to avoid an unmooring of inflation expectations. Fiscal support can appropriately shift toward more targeted measures and be tailored to country-specific characteristics.” 

–Obviously, the CBs are not being particularly vigilant, inflation expectations seem to be coming unmoored, and the market is close to taking matters into its own hands.  The Fed appears to be boxed in.  Crude oil this morning near a new high with CLX1 trading up 95 cents at 81.39.  China’s Factory gate inflation “rose to a record on soaring commodity prices, but weak demand capped consumer inflation…” (RTRS).  China PPI was +10.7%.  US PPI on tap for today expected +8.7% with Core +7.1%. 

Posted on October 14, 2021 at 5:45 am by alexmanzara · Permalink
In: Eurodollar Options

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