Weakening data prevents market from setting higher terminal rate
August 24, 2022
–Tone set early as Global US Service PMI was horrendous at 44.1, lowest since June 2020 (pandemic). New Home Sales equally dismal at 511k, lowest since early 2016. Data sparked a front end rally which wasn’t sustained, though red euro$ pack still closed UP 5.125 while golds were DOWN 4.0. Pretty much a reversal of Monday. Though SFRZ2 has had a couple of lows in the 9620’s, over the past month it has held at 9636. The chart looks like it could waterfall lower on a technical basis, but fundamentally the market seems to have accepted a terminal rate for this hiking cycle of 3.5/3.75%.
–A couple of large plays: -40k SFRH3 9625/9600 put spread at 11.25, settled 10.0 vs 9627.0. According to prelim open interest sheet, the top strike +11k and lower +2k so apparently new sale (at least of upper strike). Buyer of 40k EDZ2 100c for 0.25 likely cover.
–Late in the day a report claimed that St Louis and Minneapolis Feds favored going 1% at the last FOMC. Market easily absorbed that tidbit. Vol edged a bit lower, the ten year yield was up just over 1 bp to 3.046% in front of today’s five-year auction.
–Grains and oil look as if they’ve set bases from which to rally, led by corn yesterday. C Z2 settled 655 1/4, up 26 1/4 yesterday, the highest level since late June.
