Inflation improving, job market weakening
July 11, 2024
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–Powell says he needs better data to increase his confidence that inflation is sustainably moving towards the 2% goal. Probably get it today (though he again said yesterday that the Fed’s focus is mostly on PCE prices). CPI expected 0.1 with Core 0.2 m/m. Yoy expected 3.1 from 3.3 with Core 3.4 from 3.4. He also again indicated that emphasis has shifted more towards labor market conditions.
Additional releases today:
Real Avg Weekly Earnings yoy 0.5% last
Jobless Claims 235k
30-year auction.
–SFRU4 options expire 13-Sept and the FOMC is 18-Sept. SFRU4 settled 9487.5. SFRM4, which still trades, settled 9464.75. So Sept is close to reflecting an ease (spread of -22.75), as is FFV4 which settled 9486.5. The big trades were in SFRZ4 options. SFRX4 9525/9550/9575c fly bought for 3.5, 25k (expires after election and Nov FOMC), and SFRZ4 9525/9550cs 6.5 paid for 65k covered 9521 with 20d. Both trades are new, and obviously work best as SFRZ trades above 9525. The contract settled 9520.5 with an increase in open interest of 29k. SFRU4/Z4 three-month spread settled -33. SFRZ4 options expire 13-Dec and the FOMC meetings are 7-Nov and 18-Dec. Eases at the last three meetings of the year, Sept, Nov, and Dec, would likely result in the 9525/9550c spread gaining full value.
–Another interesting curve trade, +10k SFRH5 9600c/-10k 0QH5 9700c for flat. Both calls settled 16.0, but the front is just 47 otm (9553) while 0QH is 67 otm as SFRH6 settled 9533. This trade works best on aggressive, forced easing. The roll is a headwind, as Z4 9600c settled 4.25 and 0QZ 9700c settled 9.25. (9520.5/9616.5).
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This is a rather interesting post with link below (thanks TMS):
chart ranks all $SPX 1m realized vol outcomes from high to low since 1990. At 5.4% right now, we are in the 1st percentile of outcomes. 1m realized vol on $NVDA and $AAPL are 9x and 6x, respectively, the same for the SPX. That is unheard of.
Let’s consider another month, Dec’17, when SPX realized vol was 5.5. The two largest stocks in the index were AAPL and $MSFT. What were their respective ratios of realized vol to the SPX in Dec’17? AAPL was 2.7x the SPX. MSFT was 3.6x the SPX.
There are 100’s of blns of $ of market cap “coming and going” in giant names, especially NVDA. A 3T company moving on a 50 vol is not healthy. There’s rampant speculation that is overwhelming the option market’s capacity to absorb gamma risk. The extent to which these meaningful vols on the single stock level do not translate to index vol (NVDA 50, SPX 5), is very unusual and likely not sustainable. Broken record statement: “The very same conditions that cause stocks to become more volatile also cause them to become more correlated at the same time”
Of course, this vol analysis sort of reflects the same thing that everyone already knows: the market is extremely dependent on just a few names. But the gamma risk associated with the dispersion trade may be underappreciated.
