Using strong data as a chance to take profit
February 16, 2023
–Strong Retail Sales data (+3.0%) sparked selling pressure on rate futures, but the front four qrtrly SOFR contracts came back to close positive on profit taking. The lowest contracts on the SOFR strip, June and Sept’23 closed up 4 on the day (9476.5 and 9478.0). By contrast June and Sept’24 were down 5.5 and 6.5 (9579.0 and 9614.0). The one-year calendars made new highs, with M3/M4 at -102.5 and U3/U4 -136.0. The ‘pivot’ to Fed easing is being less aggressively priced, but it’s worth noting that the only positive 3-month SOFR calendar is March’23/June’23 at +29.5. Every contract past June is subsequently higher in price until Dec’26/March’27 which settled +0.5 (9683.5/9683.0).
–There was obvious profit taking on shorts, for example a block sale of 46k 0QM 9550p at 24.5 covered 9573.0. The original buy of this put was on Feb 1, FOMC day, paying 5.0 ref 9661.0. That’s an astonishing 88 bp swing in futures in just ten trading sessions. Prior to the block, that put was quoted in the pit and the market was 25.5/26.0 covered 73; gave 1bp on the block to get the size done. Longer curve trades also saw a profit taking bounce from the lows, for example 2/10 printed a 40+ year low at -92 but came back to end at -81.5. I marked the 2y around unch’d at 4.622% and tens +4.6 at 3.807%.
–Today’s news includes PPI expected +0.4% m/m vs -0.5 last, with yoy expected 5.4% from 6.2 last. Philly Fed as well, which was 4.9 last.
–There were a few large VIX call spreads bought yesterday, but BBG focused on “the return of 50-cent” reporting a buy of 100,000 May 50 calls for 0.50. Spot VIX closed at the bottom of the recent range at 18.46.
