Getting to the door first
January 7, 2022
–Employment report today with NFP expected 400k. This morning WTI crude is above $80/bbl, within $2 of last year’s high. Yesterday a friend mentioned that June’23 Brent 150 calls were bought for 0.95 in size of 10k, a strike that is more than double the price of the underlying.
–The market continues to aggressively price odds of near term hiking. EDH2/EDM2 settled 29 bps and was 29.5 bid, a new high. In October this calendar spread was around 5.5. EDH2 settled 9959.5 or 40.5 bps, compared to the current libor setting around 22. There are FOMC meetings March 16 and May 4. April Fed Funds settled 9970.5 or 29.5 bps vs Fed Effective average of 8, so the market has priced the odds of a March move just over 80%. I personally think May is the more likely meeting for liftoff; FFJ2/FFK2 settled 9.0. FFF2/FFF3 settled 85.75 bps, pricing approx 3.5 hikes for this year.
–Even though the shift in perception favoring near-term hikes had flattened the curve, the ten year yield was up another 2.7 bps yesterday to 1.732%, within a bp of last year’s high. A close above 1.75% could be considered a breakout. What’s surprising is that vol, though not exactly cheap, hasn’t been pushed significantly higher. I marked TYH 128.5^ at 1’48 or 5.0%. TYH 127 put continue to be accumulated, with whopping open interest of 259k, up 14k yesterday. Settled 23/64, delta -0.25. The ten-year will be about 19 bps higher at that strike if the curve move is parallel, or 1.92/1.93%. One notable trade from yesterday was sizable selling of FVH2 120.75c, which settled 11.5 vs 119-2775 (0.24 delta). Open interest rose over 56k on these new sales to 63k, helping to hold down vol. Not sure what this is against, but was done in clips throughout the day, so it’s not likely a naked sale.
–Bitcoin hovering around 42k, near the lows of last September, about 37% off last year’s high, another reflection of the receding tide of liquidity. For now, Nasdaq is holding December’s lows, but the implications of a Fed trying to gracefully withdraw support could start to resemble a Three Stooges episode.
