August 1. FOMC meeting. Accommodative for now.
–The main influence Tuesday was the Bank of Japan non-event. Treasury vol had been bid going into the meeting, but deflated afterwards. An example of how it fizzled can be seen in USU8 145 calls. On Monday, these calls settled 16, versus 142-20. On Tuesday, the underlying contract settled +11/32’s at 142-31. And the 20 delta 145 calls? Unchanged at 16. Expire 3 weeks from Friday. However, Japan’s yields have rebounded this morning with the ten year at 12 bps and 30 year at 80 bps; it appears the BOJ is being tested, with possible spillover implications for US bonds (and vol).
–The wage component of Q2 ECI (for private industry) was up 2.9% yoy. The Atlanta Fed wage tracker for June is 3.2%. While Core PCE prices yoy were a shade under the Fed’s target of 2%, (actual was 1.9%), the last piece of the Fed’s inflationary puzzle was wage growth, and it appears to be strengthening. FOMC meeting this afternoon isn’t expected to result in a rate change, but there’s talk of language modification… “the stance of monetary policy remains accommodative”… FOR NOW.
–Stocks rallied after AAPL’s results, but gains have reversed as the US threatens increased tariffs on China. TSLA reports today after the close.
–Vol eased in eurodollars as well with straddles down 0.5 to 1.0. Notable selling in EDV 9737 straddle at 11.0 and in 0EZ 9700 straddle at 29.5. Late buy of 5k EDM20 9600 put for 3.0 ref 9694.0. Hey! that was my idea… In any case that’s one of the strikes that had been heavily shorted due to put ratio trades, with open interest of 132k. EDM0 9625/9600p 1×3 settled 2.5, 6.5 and 3.0. We paid 1 for 3 legs a few sessions ago. Worth considering some long bond puts given depressed vol levels. For example USU 140p settled 11. If the long end of Japan can’t be contained, all bond markets will be vulnerable in the short term.
–Interesting tweet from Holger Zschaepitz, “ECB balance sheet has hit another all time high…. ECB balance sheet now equates to 41.3% of EZ GDP, while the Fed’s shrank to < 31% of US GDP.
