May 18, 2022
–Saw this on twitter: “Wall Street is heading into a summer from hell – a period of extreme volatility that top investors say will bring a near-biblical reckoning.” I like it, Even if it WAS churned out by a bot. I might have modified it a bit by substituting ‘The US’ for Wall Street and omitting ‘near’. In any case, the volatility part has a ring of truth to it, as moves in the red eurodollars for example, seem to be greatly exaggerated recently. Yesterday the red pack (2nd year) led the strip lower, closing down 17.5 as Powell reaffirmed inflation as enemy number 1. George Austin from Pricing Monkey also put out an interesting tweet about heavy buying in VIX 75 strike calls for September and October, noting that 100k Sept 75 calls traded yesterday and closed 89 cents. VIX closed 26.25. An options market-making friend told me that NatGas Jan/Feb/March 50 dollar call strip has been active…with the underlying contracts averaging 8.12. The reach for what previously seemed like unimaginable strike prices across markets is astonishing. For now, anyway.
–The five year yield surged 13.7 to 2.95% yesterday and 30s rose 8 to 3.16%. I.e. the curve flattened, pulling back from its recent pop. When the Fed changed the framework in August 2020 to make unemployment the primary concern, it set on a course which in hindsight (thanks Ben) led policymakers to overshoot the goal (by standing still). Now Powell has made inflation-fighting the number one goal, (“restoring price stability is something we HAVE to do”) and we’re supposed to believe that the man behind the curtain can engineer a smooth ride back to Kansas. Yes, over at the Fed they have one thing I don’t have, a diploma.
–EDM3 settled 9655.5, essentially at the midpoint of April’s high – 9689 – to May’s low – 9619. Bouncing around in a 70 bp range in the first red. It’s no wonder that keen observers have identified volatility as a new watchword, along with its insidious cousin, illiquidity.
–Housing data today. The current 30 year mortgage rate is 5.42%. On average, the rate in April was about 50 bps higher than March, which in turn was about 50 higher than Feb. I don’t know what April Housing Starts will show, but I do know that higher mortgage rates are starting to price buyers out.
