An itsy bitsy gully
June 15, 2022
“The market’s in an itsy bitsy little gully right now. Like everybody says, ‘OK that was crazy let’s just all calm down'”. That’s a line from The Big Short, delivered by the Florida real estate agent showing Mark Baum around a subdivision with For Sale signs everywhere. (But of course it could be Christine Lagarde this morning. Or anyone long crypto). It’s not that I think the core of upcoming problems are related to residential real estate, though Compass and Redfin are cutting staff as the doubling in mortgage rates this year impacts housing. In my opinion, it’s just that the little gully might be macroeconomically much larger.
–ECB holding an emergency meeting to address market stress. Biden releasing oil from the SPR; CLN2 this morning around 117.50, about $6/bbl off yesterday’s high. FOMC today of course.
–Here are a few observations on yesterday’s trade:
1) FFF3/FFF4 collapsed to 3.5 bps, a new low. On June 1 this spread was 23.5. The takeaway is that the Fed will be done hiking THIS year, leaving nothing to do next year.
2) Nominal ED straddle levels are the highest I can remember.
For example EDZ2 95.875^ settled 94 with a bit over six months left. I guess a decline of 90.5 bps in a week in the underlying from 9676 to 9585.5 will cause expansions in premium.
3) on the other hand TYU 114.5 atm straddle settled yesterday at 3’50 with 73 days to go. On March 10, 2020 (during COVID) the TYM20 137.5 atm straddle was 4’40, also with 73 dte. (and it had been higher).
4) March’23/June’23 ED and SOFR 3m calendars both inverted around -4.5; bringing perceptions of the oncoming recession closer in time.
5) ED reds to deferred contracts steepened. As an example EDM3/EDM6 traded -85 early in the session but came back to settle -75.5. Red pack settled -3.375, grns -7.25, blues -11.125 and golds -11.5.
6) FFQ2 at 9769.5 is just a couple of bps away from what will be the new Fed Effective of 233 if the Fed hikes 75 and 75. FFF3 at 9631 suggests 286 bps of tightening thru year end, including tomorrow.
7) SFRZ2 to EDZ2 out to a new high 39 bps…no surprise as credit spreads generally widen
The last SEP in March pegged PCE inflation at 4.3% in 2022, 2.7% in 2023, and 2.3% in 2024. These numbers have to go up, as do the dots.
https://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20220316.pdf
| Summary of Economic Projections – Federal ReserveFor release at 2:00 p.m., EDT, March 16, 2022 Summary of Economic Projections InconjunctionwiththeFederalOpenMarketCommittee(FOMC)meetingheldonwww.federalreserve.gov |
Large trades yesterday include +40k SFRZ2 9750/9775/9800c fly for 1.0 (settled there ref 9624.5
+50k EDU2 9687.5/9650/9612.5p fly for 8.5; settled 8.0 ref 9657.5. new position.
+20k TY week3 113/112p spread mostly for 6; settled 8 vs 114-13, new position.
