Legacy
January 6, 2022
–Robert J. O’Brien Sr passed away yesterday at 103. I never had the honor of meeting him, but that’s one hell of a legacy to have built a private firm with your name on it, that has thrived and competed to this day. I don’t think that can happen without a core of integrity. He also served as Chairman of the CME from 1967 to 1968, helping to transform the image of the exchange into a respected financial institution.
–Stocks and bonds were walloped after yesterday’s release of the FOMC minutes. SPX sown 1.9% and Nasdaq down 3.3%. Ten year yield rose over 4 to 1.705%. Some financial press summaries have pointed to the idea of faster rate hikes, but that has been priced into the front end of the curve for a long time, with FFF2/FFF3 holding around 75 bps, indicating three hikes over this year. It was a discussion of balance sheet shrinkage which knocked the wind out of the sales. With inflation raging, the only way the thirty year bond yield could remain under 2% was through constant support of the Fed. Further hints on withdrawal from that role only means one thing, and that’s that real rates rise from severely negative levels.
–Some commodities are getting hit this morning, with gold down $25 to around $1800. perhaps with the idea that a Fed more cognizant of the risks of inflation is finally going to get serious about tamping down. However, energy is a key driver of prices, and WTI is up 1.25 this morning to 79.10 (CLG2), within $3/bbl of October’s high. And it’s 8 degrees here in Chicago, that’s when the heating bills get pricey!
–In spite of a move higher in rates yesterday and a huge ADP number of over 800k, implied vol in rates fell on the front part of the curve. Most ED straddles lost 1.5 to 2 bps. I like to gauge the strength of trend by price movements, increases in open interest and higher vol. Open interest across rate futures was mixed yesterday, and vol was quiescent. Price is the most important, of course, but for now it doesn’t seem as if fear has really gripped rate futures. Perhaps tomorrow’s payroll report will do the trick.
