EUR: EUR/USD Gravitates Toward Sizeable Strikes as Volumes Pick Up
Greenback finding very little support from the persistent climb higher in US yields, with the recovering EUR and strength in US stock futures driving price action here: EUR/USD is now well clear of the 1.05 handle and again visiting the post-ECB high.
- As mentioned a few times today - there remains significant options interest in EUR/USD above, most notably the $6.6bln strike rolling off at 1.0600 on Monday - a position that's built well across the week.
- Participation in the rally off the lows looks very healthy, with volumes really picking up on the latest EUR strength. Over $500mln cash equivalent traded in the H5 EUR future within three minutes from 1240GMT - easily the best volumes of the session so far.
- No specific news or headline drivers behind the rally - the appointment of the new French PM met very little market reaction across French bonds, with pressure from the RN still the near-term driving force in French politics - leaving quiet markets to drift higher and towards some of the more sizeable strikes.
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US TSYS: Early SOFR/Treasury Options Roundup: Mixed Wing Trade Ahead CPI
Decent SOFR and Treasury option trade overnight mixed positioning ahead of this morning's key CPI inflation data at 0830ET.
Underlying futures mildly weaker in 2s-5s while 10s-30s make moderate gains. Projected rate cuts into early 2025 vs. late Tuesday levels (*) look steady to mildly lower: Dec'24 cumulative -15.5bp (-15.5bp), Jan'25 -23.0bp (-23.0bp), Mar'25 -35.1bp (-36.0bp), May'25 -41.3bp (-41.8bp).
- SOFR Options:
- -20,000 SFRM5 95.75 puts, 20.0-20.5 ref 95.90 to -.895
- 2,500 SFRX4 95.62/SFRZ4 95.75 call spds ref 95.555
- 2,000 0QZ4 96.25/2QZ4 96.37 call spds
- 5,000 SFRZ4 95.50 puts, 4.25 ref 95.55
- 1,000 3QM5 94.75/95.50 3x2 put spds ref 96.17
- +3,600 SFRM5 96.75/97.00 call spds, 2.5 ref 95.95/0.05%
- 2,000 SFRX4 95.62/95.68 2x1 put spds, 2.25
- Treasury Options:
- +15,700 TYZ4 110 calls, 16-15 ref 109-16.5 to -15
- -20,000 TYG5 106.5 puts, 19 ref 109-20
- 9,900 Wednesday wkly 10Y 109.25 puts, 8-9 ref 109-15 to -14.5 (expire today)
- 2,000 Wednesday wkly 10Y 109/109.25 put spds, 5 ref 109-16.5
- +19,200 TYG5 107.5/108.5 put spds, 20 ref 109-17
- +15,000 TYF5 112.5 calls, 11 ref 109-17
- 2,000 TYZ4 110.75 calls ref 109-15.5
- 2,500 FVZ4 107/107.25/107.5/107.75 call condors ref 106-14
- +2,000 TYZ4 110/110.75/111.5 call flys, 7 ref 109-15.5/0.11%
GERMANY: Scholz Addresses Bundestag For First Time Since Gov't Collapse
Chancellor Olaf Scholz is addressing the Bundestag for the first time since the collapse of the 'traffic light' coalition and the start of negotiations between parties to agree on a date for a confidence vote and early federal election. Livestream (in German) here. Scholz is expected to outline why he removed Finance Minister Christian Lindner from office, sparking the withdrawal of Lindner's pro-business liberal Free Democrats from gov't resulting in the loss of the coalition's majority. The chancellor is also expected to try to talk up the achievements of his gov't (and in particular his centre-left Social Democrats, SPD) in what can be seen as a 'first campaign speech'.
- Starting his address, Scholz claims there are 'urgent topics where parties can reach agreement, even before the elections.' Says that 'We can agree to legislate to tackle fiscal drag before the election.' Also proposes agreements on increasing child support benefits, and strengthening protections for the Constitutional Court.
- After Scholz, conservative Christian Democratic Union (CDU) leader Friedrich Merz will speak followed by Foreign Minister Annalena Baerbock for the Greens, then Lindner, followed by far-right Alternative for Germany leader Alice Weidel.
- FT reports that Scholz is likely to be confirmed as the SPD's chancellor candidate despite broad public antipathy towards the incumbent. Some members favour the more publicly popular Defence Minister Boris Pistorius, but Scholz has seemingly won grassroots support by ousting the fiscally conservative Lindner.
US INFLATION: Used Cars, Rents Key To Steady Core CPI Print
Ahead of today's October CPI release, a reminder of what to watch for: sequential core CPI is seen coming in basically the same as prior (roughly 0.30% vs 0.31% Sept), with headline edging up (0.20% vs 0.18% September). The accompanying table shows consensus expectations across key categories of core CPI. To sum up expectations: the largest core categories are seen basically unchanged, but the volatile categories are seen reversing prior moves and essentially offsetting each other.
- Used cars (large +ve): Used vehicles are seen as one of the primary upside drivers of sequential inflation in October, with analysts citing industry / wholesale surveys and idiosyncratic factors (hurricane-related replacement vehicle demand) for upside in October. The October expectation is for 2+% gains in this category vs 0.3% in September, in turn driving the broader core goods category higher.
- Vehicle insurance (small -ve): After a strong 1.2% print in September, auto insurance inflation is seen moderating slightly in October (to 0.8%), though the bigger picture is that this category continues to show signs of post-pandemic inflation “catch-up”.
- Rents (steady): There is no disinflationary progress seen in rents, with MNI’s collation of estimates showing that OER and primary rents are both seen coming in exactly the same as September (0.33% / 0.28% respectively). Analysts (and the Fed) generally expect rents to continue coming down over time.
- Airfares (-ve): As with used vehicles, analysts see industry data as pointing to continued strength in airfares, albeit at a significantly slower pace than September’s 3.0% (estimates are towards but below 1.0% for October).
- Lodging away from home (+ve): After an unexpectedly weak September (-1.9%), lodging prices are seen rebounding, with a rise of roughly 1.0% in October – again, with analysts citing relevant industry data.
- Non-core: Energy (+ve): The relative upside in headline M/M inflation compared with core this month largely stems from an expectation that energy prices will drag less in October .(-0.6% median / -0.9% mean) than in prior months (-1.9% Sept). Despite gasoline prices softening, natural gas prices are seen to have risen sharply.
- Food (-ve): Food price inflation came in at a strong +0.4% in September, but this is seen easing back slightly in October to 0.2%.
