What the hell is the world gonna look like post-election?
August 15, 2024
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–Pressure on near contracts and on implied vol in rate futures as CPI printed as expected: 0.2% m/m headline and core. SFRU4 was the weakest contract on the SOFR strip, settling 9511.0, down 4.5 on the day. The high tick on August 5 was 9547.5 with a settle of 9528.5. Was it Roaring Kitty advocating emergency rate cuts? Because this looks an awful lot like GME. October FF settled 9501.5 yesterday, also down 4.5, and now leaning closer to a 25 bp cut in September rather than 50 (even odds is a price of 9504.5). Due to weakness in SFRU4, U4/Z4 3-month calendar and U4/U5 1-yr calendar made new lows at -68 (9511/9579) and -166.5 (9511/9677.5). It appears as if sentiment currently favors near-term easing to be somewhat aggressive (after the election), followed by a lull. Actually, U4/Z4 at -68 is an extraordinary level capturing pre- to post-election. SFRZ4 9581.25 straddle settled 44.75. I’m not saying I would be a buyer at that level, but it’s not a good sale.
–Consider this: SFRZ4 settled 9579 or 4.21%, 116 bps UNDER the current midpoint of the FF target. So there’s a lot of easing priced in. Now, look at the 9650c, which is ANOTHER 71 out of the money. That settled 7.25. Breakeven is 9657 or 3.43%. OK, so 71 out-of-the-money is worth 7.25…it’s a crazy world right? How can I say that’s “wrong”? Now look at the downside. SFRZ4 9525p settled 1.75 (traded 2) and are just 54 otm. So I buy 3 of the puts for 2, sell one of the calls at 7, and still have $25 left over for the breakfast special at Denny’s. What could go wrong? (THIS IS NOT A RECOMMENDATION. THERE ARE MUCH BETTER BREAKFAST PLACES THAN DENNY’S)
–Treasury curve reflected the same dynamic. Curve flattened with 2s up slightly in yield to 3.947% and 10s down 3.4 bps to 3.818%. Retail sales today expected +0.3, Jobless Claims 235k and Philly Fed Mfg 7 (from 13.9 last). The market is expecting to glide through this data without much drama. Treasury vol was hit fairly hard yesterday. For example, TYU4 113.75 straddle settled 53 vs 113-245. On Tuesday, TYU4 113.5^ settled 1’04 vs 113-20. The atm October straddle went from 2’03 to 1’59. Worth noting that Sept treasury options expire one week from tomorrow, after Powell addresses Jackson Hole.
