Worst is over?

January 13, 2022

–CPI hit 7% yoy, with Core 5.5%.   There are hints in the financial press that the worst is over in terms of inflation.  In the Chicago area we’ve had a couple of days of sub-zero weather.  We’d like to think the worst is over…but it’s only mid-January.  It’s still going to be cold.  FT notes a ten year high in nickel as demand for electric vehicles builds.  New high in WTI yesterday with CLG2 printing 82.57 late, +1.35.  Recent high on Oct 25 was 82.13.  Not much reaction to the ten-yr auction yesterday; at futures expiration TYH was 128-185 and the 10y yield was 1.725, down 1.9 bps.  But by electronic close TYH was trading 128-11+, where it is now.  Thirty year auction today.

–Gundlach mentioned that CPI tends to follow ISM prices paid, and the latter indicator has taken a big drop recently.  Without fiscal and monetary stimulus the economy is likely to slow.  Several Fed officials have moved up their hiking projections; Bullard (the most likely Fed official to sell low and buy high) says that four hikes are likely this year.  The eurodollar curve edged a bit flatter with reds +1.75 and golds +4.5.  There is only a 20 bp difference between the last red (EDZ’23 at 9815.5) and the last gold (EDZ’26 at 9795.5).  The 5/10 treasury spread is at a similar value of 23.3.

–February treasury options expire one week from tomorrow; April puts in TY are starting to see some action with TYJ 126p the peak OI so far at 14.7k, settled 21 with a -0.19 delta vs M2 128-145.  TYH2 127 puts maintain peak OI interest with 310k open, settled 16 with delta -0.21 vs 128-185.

–Vol easing out of rate products.  For example, EDZ2 9875^ settled 47.5 yesterday, -1.5 with futures +0.5 at 9879.5.  Recall that after the Dec FOMC there was an aggressive seller of over 50k EDZ2 9900 straddles at 51.5 to 50 when that was the atm strike.  Even though the put is now 20.5 in the money, that straddle settled 50.0 yesterday.  A grind back up towards strike will see the 9900 straddle trading 45 very quickly.

–Today’s news includes PPI expected 9.8% yoy with Core 8%.  Could we possibly see a 10 handle?  Additionally, Brainard testifies at her nomination hearing.  The prepared remarks were released yesterday:
“But inflation is too high, and working people around the country are concerned about how far their paychecks will go. Our monetary policy is focused on getting inflation back down to 2 percent while sustaining a recovery that includes everyone. This is our most important task.”

–Well they were pretty good at getting inflation slightly above the 2% target, but even though the talk has turned tough, they won’t have the stomach to tighten the monetary screws if stocks turn lower. 

Posted on January 13, 2022 at 5:26 am by alexmanzara · Permalink
In: Eurodollar Options

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