Key Takeaways with Craig
CME Equity Index futures rallied overnight but declined sharply after the CPI number was released at 7:30 AM Chicago time and indicated a higher than expected rate of inflation in September. However, in late morning action US stock prices made a dramatic turnaround rallied into positive territory. Ultimately, the four major US indexes were up by between 2.3 and 3% on the day. Somewhat interestingly, implied volatility in the E-mini S&P 500 and Nasdaq-100 in option with 30 days left until expiry was steady to slightly higher even with the price rally.
US Treasury yields rose, mostly in the short end where the Micro 2-Year Treasury Yield was up by 13.3 basis points. The Micro 10-Year Yield was only up by about 5 basis points so the inversion widened to over 50 basis points. Expectations for more aggressive FOMC action also rose according to CME’s FedWatch tool which reflected that the probability of the Fed Funds target rate 150 basis points higher than it is today at the December meeting rose from 32.5% to 71.6%.
Using CVOL, CME’s proprietary volatility index, we can get a nice intra-day picture of the options action in CME’s 10-Year Treasury options. The dotted blue line in the graph below shows the drop in price (rise in yield) when the number was released this morning, the solid blue line shows the spike in volatility and the purple line shows the skew change. As you can see, the skew initially was toward the Puts when the number was released, but by the end of the day, the Calls were trading nearly as high relative to the Puts as they were yesterday. And remember, that’s Calls on the price of Treasuries which moves inversely to the yield.
At least for today, the stock market was able to shrug off a higher than anticipated inflation reading; we’ll be back tomorrow to recap the week.
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