One hike disappeared from the radar
March 1, 2022
–Conflict in Ukraine caused significant short covering in the front end Monday, which started with a block buy of 50k EDU2 at 9852.5. Other buy blocks included 20k EDM2 9892.0 and 50k EDH2 9933.5. Open interest was down 29k in EDH2, 49k in EDU2, 78k in EDZ2 and 29k in EDH3 (up 15k in EDM2). As shown on the attached chart, the block in EDU2 was instrumental in causing a plunge in EDM2/EDU2 spread which fell 8 bps to 32.0, essentially erasing the jump associated with the 7.5% CPI print on February 10. Odds for a hike of 50 bps have all but evaporated with April FF settling 9965.0. (A hike of 25 should cause the contract to settle 9966 to 67). It’s worth noting that EDU2 was trading 50.5 at the time of the block, but bid/offer sizes have become sparse as liquidity suffers. EDU2 settled 9960.0 (+19.5). Apart from the short end, there was size buying of April TY calls. In the morning +30k TYJ 129c 11-12 (settled 24 with OI +26k) and through the latter part of the session +50k TYJ 130c from 9-13 (settled 14 with OI +32k). The strongest contract on the euro$ strip was EDM3 at 9791.0, up 22.5 on the day. In Fed Funds FFF’23 rose 21 to 9856.0 or 1.44%. In other words, one of the hikes that had been priced for this year has been thrown in the dustbin due to financial instability risks.
–On the inflation front, raw materials are still indicating problems, with oil again nearing $100/bbl this morning (CLJ 98.99) and grains reversing the sell-offs seen at the end of last week. May Corn prints 713. Aluminum continues to surge. Aluminum to zinc (with a little smiley arrow connecting the two). Breakevens are near new highs, with the ten year treasury vs inflation-indexed note closing at 265 bps; the year’s high has been 277. –ISM Mfg expected 58.0 from 57.6 last, with Prices Paid 77.5 vs 76.1. State of the Union speech tonight. Powell testifies tomorrow.
–I personally believe a no-fly zone is about to be announced over Ukraine which will raise the stakes. By a lot. As Winston Churchill once said, “You can always count on the Americans to do the right thing… after they have tried everything else.”
