Tis but a scratch
July 14, 2021
–CPI yesterday was 5.4% with Core 4.5%, both much higher than expected, but an initial sell-off in rate futures was met with buyers, with US and WN almost immediately trading positive on the day. The weakest contract on the board was EDZ’23, which settled -8 at a price of 9891 or 1.09% (as compared to EDZ’21 at 9980 or 20 bps, and EDZ’22 at 9947.5 or 52.5 bps). Right after the data, there were two 20k block sales in EDZ’23 down to 9891; open interest rose 44.5k, so these sales appear to be new shorts. Worth a note that NFIB small business optimism was also stronger than expected at 102.5.
–The thirty year bond auction gave an indication that low treasury yields could cause a buyers strike. Just prior to auction the yield was 1.976%, but it went off at 2.00% and subsequent activity brought a close of 2.033 (at futures settlement), up 3.9 bps on the day. Earlier, there had been a new seller of at least 20k TYU 132.5/134.5 strangles at 49. As futures sold off in the latter half of the session, the late market was 52/54 with a settle of 54 vs 132-315. It’s a continuous struggle between complacency related to the idea that inflation is transitory (as used car prices comprised a big part of the CPI jump) and lingering concerns that perhaps things have fundamentally changed and accepting hugely negative real yields isn’t a viable investment strategy for anyone except the central bank. Reuters notes in a headline that “inflation has likely peaked”, and Powell’s testimony today on Capitol Hill will surely repeat that theme. On the other hand, Bullard worried yesterday that housing has been overly stimulated by the Fed’s easy policies.
–Beige Book today will be overshadowed by Powell’s comments, but it’s worth noting that the next FOMC is just two weeks away. Today also brings PPI, expected at a blistering 6.7% yoy with Core +5.1%. And of course, more government help is on the way, with Senate Dems agreeing to $3.5 trillion budget reconciliation bill.
