Every quarter
January 20, 2022
–While financial commentators have wildly sketched out scenarios for 6 to 7 hikes this year, a buyer of 70k EDM2 9925/9937.5/9950 c flies is targeting the quarterly meetings. EDM2 is currently 9921.5. The call fly traded and settled 2.25. Max profit of 10.25 occurs at middle strike 9937.5. 3m libor set yesterday at 25.514 bps, but it’s been grinding up as we move closer to the first hike, a week or two ago it was more like 20 to 22. Let’s take 22, and forecast a hike in March and one in June leading to a libor setting of 72 or a final settle of 9928.0 for EDM2. Because the June meeting is just after contract expiry, there’s a chance that the contract might not even price 100% odds of a hike, so it could conceivably trade 9930 or a bit higher. There is an FOMC meeting on 27-July; odds of a hike at that meeting would negatively impact the price of EDM2. So the fly buyer is most likely thinking March, June. Sept and Dec. Four on the year.
–Many references to Nasdaq being in “correction territory”, down 10% from the high. Once again, it’s worth a mention that total market cap to GDP is over 200%. A drop of 50% would erase a year’s worth of income. If you believe in the wealth effect, and I believe the Fed does, then there will be no surprises in the tightening schedule because a hard break in asset prices could throw the economy into a tailspin. By the way, a long term mean of mkt cap to gdp is 85 to 90%.
–Yields eased yesterday with tens -4.1 bps to 1.825%. There was an exit sale of 15k USH 153/152 put spread (19 settle ref 154-18) corresponding with yesterday’s 20-yr note auction. 5/30 spread grinding to a new low at 52.7.
–Today’s news includes Jobless Claims (225k) and Philly Fed (19.0 from 15.4).
