All the king’s horses and men
February 11, 2022
–Historic day on the short end with a yoy CPI print of 7.5%. At settle whites -23, reds -23.25, greens -11.625, blues -8.125 and golds -7.5. At settle, the weakest ED contract was EDU’22 at 9835.0, down 28.5 on the day, with EDZ’22 -28.0. But shortly after the settle EDZ2 was printing -37, below 9800.0 (it settled 9805.0), and it’s 9795 this morning. in spite of a Bloomberg headline saying the Fed doesn’t favor an emergency hike or a 50 bp hike. So EDZ2 above 2% with FF at 0-0.25.
–Straddles absolutely exploded. For example, on Wednesday the at-the-money EDU2 9862.5 straddle was 48.5 (pretty juicy), but yesterday the EDU2 atm 9837.5 straddle was 64.0. There are going to be shops that can’t meet margins from this move. As Winthorpe says to Billy Ray Valentine, “Nothing you have ever experienced can prepare you for the unbridled carnage you’re about to witness.”
–As alluded to the past couple of days, the curve was moving toward modest inversion. Yesterday it was full blown. Red/gold pack spread fell 15.75 to negative 3.5. 2/10 treasury spread fell 10.4 to a new low of 47.5, fully 25 lower than when Powell dismissed it at the last FOMC presser. 5/30 fell 7 to to 36.
–Bullard said he’d like to see a 50 bps hike and wants 100 by July. And then the talk of intermeeting hikes started. Um, that’s not how they do it. They emergency EASE, they don’t emergency hike. Well, what do I know? They WANTED higher inflation. They SAID they could control it. Bet Powell’s glad he lobbied to keep the job… On the other hand, he was clearly swayed by the vocal experts, Summers among the most strident, but Ackman and el-Erian as well, who were chirping about the Fed being behind. Well now the Fed’s ‘getting ahead’ and the curve is diving. And some stock investors might be scratching their heads and saying, if the present value of the futures stream of earnings is an asset price, and we now have to discount that stream by a higher rate, what happens?
