Tuesday, 14 September, 2021
Archr – Tactical Comments
14:16:20 CHRIS JARVIS: CPI missing has cleared the road for yields to keep grinding lower into retail sales and OpEx later in the week. This was the view I held last week but may have jumped the gun a bit with the trade idea. CPI beating was flagged as the key risk to expressing a view where markets price in lower growth and inflation while risk wobbles. We are starting to see this risk be priced out as 10y breakevens are down 2bps and the inflation curve continues to steepen as current inflation is being viewed as transitory. While the ECB leading the Fed last week make it more likely that a CPI miss today will be looked through and the Fed stay on track to taper sooner than rather than later.
Now that CPI is behind us, the foundation is still there for further TY upside as risk is skewed to retail sales missing while equity market structure is still fragile, both of which reinforce the bid in duration as TY vol pushes higher alongside it.
This framework in conjunction with short positioning and capital flow dynamics to the US provide a nice environment to trade from the long side. If want to leverage these views in to week end then I like the Friday expiry 133.75 call for 3/64ths.
09:51:27 Think next week shapes up to be quite an interesting one with a few good opportunities presenting themselves. There are 3 key events which should shape price action across markets:
1 -> Opex (Friday) within a fragile equity market structure- We have repeatedly seen equities come under pressure going into expiry, while as outlined by squeezemetrics, underlying equity market structure is fragile leaving a bias for lower prices and higher equity vol
2 -> Core CPI (Wednesday)- inflation leads are only just topping out suggesting risk may be skewed to an upside surprise. Also within the context of last weeks wages beat, any beat would challenge the transitory inflation view
3 -> Retail Sales (Thursday)- Concerns surrounding growth continue to gain pace, especially after last weeks NFP miss, and growth leads continue to imply this may not be turning around anytime soon
This cocktail of risk being skewed towards higher equity vol, an inflation upside surprise and further evidence of growth concerns, lays the foundation for curves to flatten via the front end pricing in a more sustained inflation trajectory and/or a collateral bid driving up the long end. We have also seen these dynamics play out the last 3 Opex dates (chart below), where 5s30s has flattened and TY vol has pushed higher
Like looking to flatten 5s30s (111.922 current) and as TY comes off (9/9+ current), like looking to enter next Friday’s TY exp 133.75/134.25 call spread for 5
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