FOMC day
June 14, 2023
–CPI about as expected with a big drop in yoy headline from 4.9% to 4.0%. FFM3 settled +2.25 at 9490.75 or 5.0925%, very close to the current EFFR of 5.08 and FFN3 settled 9487.0 or 5.13%. These settles indicate high market confidence of a Fed ‘skip’ today. FFQ3 settled 9474.5 or 5.255% so there’s a lean towards another 25 bp hike at the July 26 FOMC.
–Red SOFR pack was crushed despite favorable CPI, settling -17.5 at 9607.625. SFRZ3 settled -9.0 at 9486.5 or 5.135%; open interest in the contract fell 35k, so it feels like long liquidation. Implied vol fell. On Friday SFRZ3 9500^ settled 75.5 vs 70.75 yesterday while the 9487.5^ settled 72.25 Friday and 66.5 yesterday. There was a seller of 100k SFRZ3 9650/9750cs at 4.5 ref 9495, settled 4.0 (7.5/3.5) with open interest +86k in the lower strike and down 35k in the upper, so it’s a roll down. There was also what appears to be an exit seller of 40k SFRH4 9525/9725cs which settled 36.25 ref 9518; open int -24k and -33k. Though short end prices were quite weak, long liquidation and declining vol does NOT suggest a strong trend, rather it signals what is likely to be the end of the move. Having said that, price action yesterday felt as if someone saw Powell’s preparations for the presser, with the vow to hold rates here or higher at least through year end. As mentioned yesterday, the end of 2024 FF dot was 4.3% in March; possible increase today?
–Just looking at SFRU4 prices, in early Feb the contract was 9700. By early March it had plunged to 9570 on tightening fears, then the banking ‘crisis’ hit and by mid-March we were back above 9700. Yesterday’s settle was 9598, nearly 100 bps below the price one month ago, 9695.0 on May 15. So there have been several moves over 100 bps in the past four months. Midcurve Sept options (0QU3) expire in three months on 15-Sept. Worth looking at buying some call spreads? 0QN 9650/9700cs settled 4.25. 0QQ 9650/9700cs 7.0 and 0QU at 8.75.
Image is CPI index; clear deceleration in trend since mid-2022. A lot of people mistake a high cost of living with inflation. A shift to a higher cost of living is painful, and will likely continue to be painful, but a leveling off of high prices, even though still high, means significantly less inflation.
