Tie one end of the string to the tooth, and the other end to a doorknob
February 14, 2024
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-Headline CPI +3.1% yoy vs expected 2.9. Core 3.9% vs expected 3.7%. SuperCore was +0.85 on the month in Jan vs 0.34 in Jan. 3-month annualized was 6.7% in Jan vs 4.0 in Dec. The reversal in favorable inflation readings caused a 25 bp plunge in red SOFR contracts, essentially extracting one ease like a sore tooth. SFRZ4 settled 9558.5, -23.5. At option expiration in Dec’23, SFRZ3 contract pegged the 9462.5 strike. So the current Z4 price is about 100 higher, or 4 eases as compared to the 3 eases suggested by the Fed dots. SPX -1.4%. Nasdaq Comp -1.8%. Ten year yield surged 14.6 bps to 4.314%, though the curve flattened with 2s up 18.4 to 4.651%. 2/10 closed at the bottom of the recent range, -33.7.
–Near calendars settled at new highs. SFRH4/M4 three-month spread settled at -24 (9472/9496) up 10 bps on the day as H4 fell 4.5 and M4 fell 14.5. SFRH4 puts were heavily offered at 1 a couple of weeks ago and now settled 3 in-the-money and traded 6 late. There had been a large buyer of May 9475 puts for 2 (SFRM4 underlying); these settled 5.25. The prospect for an ease in March had already been priced out after Powell’s press conference and subsequent Fed speakers. The next meeting after March is May 1. On no ease, the FFK4 contract should converge to the current EFFR or 9467 (FFG3 settled 9467). On an ease of 25, EFFR should avg 5.088 or 9491.2 in May, given a pass in March. Yesterday, FFK4 settled 9477 (-8.0), essentially 60% for no ease, 40% for ease. The high settle in this contract was 9519.5 on Dec 27! At the last FOMC on Jan 31 it settled 9503.5 while April (FFJ4) settled 9481.
–Uncertainty remains high. The peak SOFR contract is now SFRH6 at a price of 9628.5 or around 3.75%. Discounting forward earnings estimates at 3.75% vs 3.25 to 3.5% (SFRH6 was 9678.5 at the start of the month) suggests lower equity prices. Retail Sales tomorrow.
