FOMC day
December 15, 2021
–FOMC today. Here’s what I think is going to happen. At 2pm when the announcement and SEP are released, there will be a knee-jerk reaction lower in near and red ED contracts because the dots are going higher as are the inflation projections, even IF the taper is accelerated. However, at the 2:30 presser Powell will temper the hawkishness and by the end of the day the curve will be steeper, long rates will be higher, short end rates will be lower, and front end vol will be much lower.
–The Fed has been buying the supply of treasuries. They have been planning for the taper for a long time, and have taken great care to set up a repo facility to make sure that funding is plentiful. If the Fed is not the marginal buyer, it is going to fall to other domestic institutions to plug the gap. But what incentivizes the private market to do so? A steep curve with a lot of positive carry. That’s exactly what we’re NOT seeing right now. The curve has flattened as Powell was beaten into submission by high inflation numbers. But take a step back. What are the pros and cons of moving the hiking timetable aggressively forward? The pro is that perhaps inflation will come down. That will likely occur in the context of slower growth. What are the cons? That stocks might come unglued. That the curve may invert and provide a huge headwind for the government in terms of finding buyers of debt because there’s no carry. The inflation numbers have become quite scary, but the curve has flattened. The market is giving Powell cover to slow-play rate hikes. In fact, the only way the government is going to be able to handle its massive debt burden is THROUGH inflation. And, if wages can keep pace with the cost-of-living, then one might say it’s a win/win from the gov’ts perspective.
–In any case, on a bond rally post-FOMC announcement and pre-press conference, I will look to buy puts on the long end.
–There was a buyer yesterday of 60k or so 0EH 9937.5/9962.5 cs for 2 ref 9881.5 to 9884 in EDH3 (settled 1.75 vs 9880.5). I couldn’t help but be reminded of all the 50k clips of EDU’20 9887.5/9937.5 call spreads and 9875/9925 call spreads that were bought in Nov and December of 2019…before COVID was well known. Those call spread were grand slams. However, I think yesterday’s was just a protective play for a policy error.
–I skimmed option open interest on TSLA going into this Friday’s expiry. The stock closed 958, lowest since late Oct. At that time there was a gap left, which will be filled just above 900. There are over 27k 900 puts of open interest for Friday’s expiry, a rather large amount relative to other strikes. A break below that level would likely get messy.
