Nov1. Implied vol firms as data looms
–China’s mfg PMI was a bit better than expected at 51.2, but the BoJ downgraded growth and inflation projections. US yields are edging a bit higher and precious metals are continuing to rebound with gold up $10 this morning. However, crude oil remains near yesterday’s low, having sold off nearly $2/bbl Monday. Late yesterday CLZ6 was 46.78, down 1.92. However, even with the move in oil, US equities were stable.
–Little movement in US rates with the US ten year falling 1.4 bps to 183. The interesting feature was an increase in implied vol, as ten year atm straddles firmed up by a few 64’ths; I marked both Dec and Jan straddles at 4.7. There was a new buyer yesterday of 20k TYZ 129.25/128.25 put spds for 18 (settled 17 ref 129-20). With Dec Five Yrs nearly unchanged, FVZ6 120.75 straddle rose 2/64’s to 45, up to 2.8. Once again, buyers of put protection in front of FOMC and employment have extended out the curve rather than focusing on the first red euro$ contract. Perhaps another indication that the market is more concerned about a steeper curve rather than aggressive tightening by the Fed.
–In terms of tomorrow’s FOMC announcement, November Fed Funds settled 9958.75 up 0.25. October expired yesterday and final settle should be 9960.3. The Fed effective rate is now pegging 41 bps, so FFX6 clearly indicates that tomorrow’s meeting is dead. However, Jan’17 Fed Funds were 9942.5 bid early in the day and came back to settle 9942, even though the morning was dominated by call buying on EDZ6, which settled +0.5 at 9905.5. In other words, odds for a December hike remain high. Surprisingly, new circus acts relating to the US election aren’t shaking Fed perceptions; the Italian referendum in early December might oddly have a larger impact.
