Key Takeaways with Craig

US Equity Index futures were sharply lower overnight but had recovered and turned positive prior to the cash market open.  All four major indexes were trading in positive territory throughout the morning as the market continued to digest the yesterday’s comments by Federal Reserve Chairman Jerome Powell. However, as has been the case lately, what happens in the morning does not necessarily predict the close and today, the major indexes were mostly lower as we head into the cash equity close. 

CME Group Interest Rates markets have been active since Chairman Powell spoke as well.  We’ve seen a substantial flattening of the yield curve as reflected in CME’s Micro Yield futures contracts:

  • 1/25 settlement price Micro 2-Year Yield = 1.033 | Current Price = 1.197
  • 1/25 settlement price Micro 10-Year Yield = 1.788 | Current Price = 1.813

As you can see, the difference between the yield in the 2 and 10 Year Treasury yield has decreased from 75.5 basis points to 61.5 basis points in just the last couple days. 

Fed Funds futures have reacted as well and CME’s FedWatch tool reflects these price moves.  According to that tool, the probability of a 50 basis point rate hike at the March meeting has increased from about 6% to 12% and the market is now pricing in a 68% chance that the Fed Funds target will have been raised from its current 0-25 basis points to 50-75 basis points by May, up from 47% yesterday.  So, according to this measure, at least for now, it appears the market is interpreting yesterday’s news conference as signaling more aggressive rate hikes. 

The moves in the 2 and 10 Year Treasuries has been reflected in the options markets as well.  As you can see in the QuikStrike graphs below that depicts the 25 Delta Risk Reversal (Call volatility minus Put volatility) in the standard CME 10-Year Treasury Note options (top graph) and 2-Year options (lower graph), we’ve seen the skew diverge in those two products.  Remember, these options are based on the standard Treasury futures (we don’t currently list options on the Micro Yield contracts) which are based on price.  So the skew in the 10-Year options to the Calls is on the price of the 10-Year, which moves inversely to yield.  

Today's Future Price Action

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