Turbo Taper Trepidation
December 14, 2021
–PPI released today, expected to be 9.2% yoy from 8.6 last, with Core 7.2%. Monster numbers. At the same time, the top headline on zerohedge is: Morgan Stanley Warns the Fed’s Turbo Taper Will Trigger Market Chaos Over ‘The Next 3-4 Months’. I didn’t bother to read the article, but continued pressure on yields and on the back end of the curve provides context to the warning. As noted several times, the three years of ED contracts from EDZ’23 forward are essentially the same price. That’s just not reflective of massive inflation concerns, especially at relatively low yields of around 1.7%. I would also mention that the ten year note to tip spread edged to a new recent low of 2.456%. If that spread is an appropriate proxy for long term inflation expectations (and I don’t really believe it fits the bill on its own) then Powell’s previous framework using ‘transitory’ could ring true.
–In any case, there was a new buyer of 50k EDH2 9993.75 calls for 0.25 yesterday. What would have to happen to reach that strike? Well, a turbo-taper that causes the wheels to fall off stocks could do it, but it would have to be a real crash! EDH2 settled yesterday at 9970 and the 3 month libor setting just over 20 bps. The Fed Effective rate is 8 bps.
