July 20. Market indicators of inflation are easing
–Yields eased Thursday with tens -2.8 bps to 284.5. In euro$’s reds rose 2.125, greens and blues +2.50. Trump said he wasn’t happy with the Fed’s rate increases, causing a brief pop in futures. I assign no predictive power to the spread between ten year treasury and inflation indexed note (tip), but in passing it’s worth mention that this spread closed at a new recent low of just 2.076%. It’s been in a fairly tight range all year between 200 and 220 bps, a sign of steady inflation expectations. Stronger dollar (and weakening yuan) help to squelch inflationary impulses.
–A blurb from Ian Lyngen at BMO noted the following from yesterday’s Philly Fed report: “The most important nuance from this report was the spread between prices-paid and prices-rec’d increased to 26.6 from 18.6…this brings the 6 month moving avg to its highest since Oct 2011. This indicates that firms are struggling to pass through higher costs to end users – think profit-compression rather than building inflation pressures.”
–Yesterday more long-dated ratios traded. EDZ20 9600/9550p 1×4 traded flat at least 25k. These are new shorts in that strike. The settles were Z0 9600p 4.75 and 9550 put 1.25. These options have nearly 2 and a half years until expiration. As a comparison, EDZ19 9600 put settled 0.5. So, over one year if nothing changes the EDZ20 puts will decay by 4.25 bps. I prefer outright longs in long dated puts, but with all the recently traded put ratios in long dated options there are over 750k shorts in EDH0, M0, U0 and Z0 from the 9637 strike down. Primary shorts are EDM0 9600 puts and EDZ0 9587 and 9550 puts, all with over 100k short.
