Key Takeaways with Craig

US Equity prices staged a broad-based and sharp rally after this morning’s CPI report, while still elevated, showed some signs of abating inflation.  The S&P 500 was up by over 5% and the Nasdaq was higher by an eye-popping 7%.  Implied volatility in the Equity Index options came off even though the balance of power in the US Congress remains uncertain. 

As much as stocks rallied, US Treasury yields fell on the news.  According to CME’s Micro Treasury Yield futures yields fell by about the following:

2-Year:  -30 Basis Points

5-Year: -29.5 Basis Points

10-Year:  -32 Basis Points

30-Year:  -22 Basis Points

With the near parallel shift downward of the yield curve, at least through 10 years, the 2s vs 10s inversion remains near 50 basis points. 

CME Fed Funds futures prices also rose, a change that was reflected in the FedWatch tool.  The tool is now showing about an 80% chance of a 50 basis point hike at the December FOMC meeting and a 20% chance of a 75 basis point hike.  Yesterday, the respective probabilities were 57% and 43%, so the market is pricing in a much greater chance of 50 rather than 75 basis points. 

Implied volatility in CME’s Treasury Options also fell dramatically after the CPI number was released.  The CVOL image below shows the break in volatility in the 10-Year yield at 8:30 Eastern when the CPI number came out.  In fact, 10-Year Yield CVOL has not been this low since August. 

In other CME markets Gold futures prices rallied and the US Dollar fell sharply against most major currencies as Treasury yields fell.  The aggregate G5 CVOL indexes, which takes into account the volatility of 5 different currencies also declined sharply today while the skew moved toward the Calls in that same basket of currencies. 

At least for today, some of the massive uncertainty was removed from the market.  We’ll be back tomorrow to report on what the end of another very active week brings.  

Today's Future Price Action

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