Vol deflation (though not yet apparent in ice cream)
May 16, 2024
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–Implied vol was hammered as CPI eased to 3.4% yoy with Core 3.6%. Retail Sales 0.0% on the month. As yields plunged, calls on treasuries underperformed. Attached chart is 1-month TY vol, about as low as it has been since the hiking cycle started. Ten-year yield fell 9 bps to 4.354%. TYN4 atm 110^ settled 1’42 vs 110-00s, on Tuesday the atm 109.5^ was 1’55. On Tuesday with TYU4 109-115, the 19 delta TYN 111.5c settled 16. Yesterday with futures up 20.5/32s or 41/64s, that same call settled 20. According to the delta it should have been (41*.19) or up about 8/64’s rather than 4 (ignoring gamma). Vol hit across curve, including SOFR. Near SOFR calendar spreads became more inverted as easing pulled forward. SFRM4/M5 plunged 12 to -100 (9470.25 unch’d/9570.5 +12).
–The market has taken the CPI report as an “all-clear” running stocks to new highs as the last big piece of news for the month is now in the rearview mirror. Today’s news includes Philly Fed Mfg, Housing Starts, Jobless Claims, Ind Production. Japan’s Q1 GDP fell 2% annualized, worse than expected. Powell gives a commencement address on Sunday.
–Is it really all clear? FT has the following story: Starwood taps credit line as investors pull money due to concerns over RE valuations. A week ago Starwood CEO Sternlicht warned that regional banks are going to start failing like dominoes…
Starwood’s $10bn property fund taps credit line as investors pull money
Heavy redemption requests come as fears rise over real estate valuations
From a May 7 interview with Barry Sternlicht, CEO of Starwood
“I think people are looking for these cracks, and you’re going to see the crack develop now,” Sternlicht said. “You’re going to see a regional bank fail every day…or every week, maybe two a week.”
CLASSIC representation of consumer indignation (I’m certainly not going to be the one to tell this little girl that the economy is great):
https://twitter.com/GhostofWhitman/status/1790584373072236750
