Russell 2000 Jumps as Inflation Cools

Also, 10-year T-note, silver, crude oil and Japanese yen futures

1. Russell 2000 E-mini futures (/RTY): +1.13% 
2. 10-year T-Note futures (/ZN): +0.47% 
3. Copper futures (/SI): +0.56% 
4. Crude oil futures (/CL): -0.36% 
5. Japanese yen futures (/6J): +0.75% 

Relief is spreading across financial markets today following the release of the April U.S. inflation report. The April U.S. consumer price index came in cooler than expected, up by +0.3% month-over-month (m/m) and +3.4% year-over-year (y/y) on the headline, and +0.3% m/m and +3.6% y/y on the core; both the headline and core readings were in line or weaker than forecasted (+0.4% m/m and +3.4% y/y expected for the headline, and +0.3% m/m and +3.6% y/y on the core). Overall, the U.S. CPI rose to 313.55 vs. an expected rise to 313.76. 

The internals of the report may prove calming as traders weigh the timing and depth of the Federal Reserve’s rate cut cycle. Food prices were barely higher (+0.002% m/m), energy prices were effectively flat (+0.078% m/m from +0.077% m/m), core services remain in deflation territory (-0.02% m/m) and core services showed further disinflationary pressures (+0.252% m/m, down from +0.32% m/m last month and from +0.403% m/m in January). 

The initial reaction lifted stock futures and bond yields dropped. For equities, markets are quickly on approach to all-time highs. For bonds, prices across the curve are attempting to clear levels last seen on April 10—the day of the prior inflation report that spooked markets. Elsewhere, lower yields are weighing on the U.S. Dollar, and the weaker U.S. Dollar is proving to be a tailwind for commodities of all stripes. 

Symbol: Equities	Daily Change
/ESM4	+0.47%
/NQM4	+0.46%
/RTYM4	+1.13%
/YMM4	+0.37%

Equity traders cheered this morning’s inflation report, betting that it will enable the Fed to cut rates sooner rather than later. The odds of a rate cut moved up to show a September cut is now the most likely probability, according to the CME’s FedWatch tool—a measure based on Fed funds futures. The small-cap Russell 2000 futures (/RTYM4)—which is filled with companies sensitive to the access of capital—leading the charge. The SPDR S&P 500 exchange-traded fund (SPY) is on track to open at a fresh all-time high, reflecting the jubilance in the market.  

Strategy: (44DTE, ATM)	Strikes	POP	Max Profit	Max Loss
Iron Condor	Long 1975 p  Short 2000 p  Short 2275 c  Long 2300 c	64%	+295	-955
Short Strangle	Short 2000 p  Short 2275 c	69%	+1185	x
Short Put Vertical	Short 2000 p  Short 2275 c	84%	+145	-1105

Symbol: Bonds	Daily Change
/ZTM4	+0.15%
/ZFM4	+0.36%
/ZNM4	+0.47%
/ZBM4	+1.09%
/UBM4	-0.80%

Treasuries are up across the curve as the threat of inflation eases. 10-year T-note futures (/ZNM4) rose about 0.47% ahead of the New York opening bell, which pushed the contract’s underlying yield to the lowest level since early April at 4.395%. Bond traders appear very encouraged by first drop for core inflation in six months. The focus now shifts to next week, when we will hear Fed chair Jerome Powell speak and get the minutes from the last Fed meeting.  

Strategy (37DTE, ATM)	Strikes	POP	Max Profit	Max Loss
Iron Condor	Long 107.5 p  Short 108  Short 112 c  Long 112.5 c	65%	+140.63	-359.38
Short Strangle	Short 108  Short 112 c	71%	+412.88	x
Short Put Vertical	Long 107.5 p  Short 108	87%	+78.13	-421.88

Symbol: Metals	Daily Change
/GCM4	+0.70%
/SIN4	+1.93%
/HGN4	+0.56%

Copper prices surged to a record high, rising 0.56% this morning as the futures market signals a steep backwardation. June contracts rose briefly above $5 per pound and outpaced later-dated contracts. The U.S. priced copper is also trading at a premium to copper priced on the London Metal Exchange (LME) and because of the price difference could cause some profit-taking over the short term. That said, prices will likely continue to have trouble at the $5 per pound level until traders reposition themselves amid the steep backwardation.  

Strategy (41DTE, ATM)	Strikes	POP	Max Profit	Max Loss
Iron Condor	Long 4.3 p  Short 4.35 p  Short 5.45 c  Long 5.5 c	66%	+325	-925
Short Strangle	Short 4.35 p  Short 5.45 c	73%	+2537.50	x
Short Put Vertical	Long 4.3 p  Short 4.35 p	84%	+150	-1100

Symbol: Energy	Daily Change
/CLM4	-0.36%
/HOM4	-0.21%
/NGM4	+1.66%
/RBM4	+0.01%

Energy markets are proving mixed today as traders await the latest weekly U.S. Energy Information Administration (EIA) inventory report due out today at 10:30 a.m. EDT or 9:30 a.m. CDT. 3-2-1 crack spreads continue to decline, which tend to be a reliable short-term indicator for crude oil prices (/CLM4). Diesel prices remain depressed. Following a third consecutive weekly drop in active rig counts (declining supply), evidence of larger than expected inventory draws could help energy find some short-term support.

Strategy 30DTE, ATM)	Strikes	POP	Max Profit	Max Loss
Iron Condor	Long 69 p  Short 70 p  Short 82 c  Long 83 c	67%	+250	-750
Short Strangle	Short 70 p  Short 82 c	73%	+1080	x
Short Put Vertical	Long 69 p  Short 70 p	88%	+100	-900

Symbol: FX	Daily Change
/6AM4	+0.52%
/6BM4	+0.39%
/6CM4	+0.18%
/6EM4	+0.3%
/6JM4	+0.75%

Is it possible there was a minor intervention overnight? The Japanese yen (/6JM4) surged in illiquid European trading hours during the run-up to the release of the April U.S. inflation report. Broadly speaking, the softer report has served as a headwind for the U.S. dollar, which is down against every major currency. Both the British pound (/6BM4) and euro (/6EM4) are attempting to break multi-month downtrends. 

Strategy (51DTE, ATM)	Strikes	POP	Max Profit	Max Loss
Iron Condor	Long 0.0063 p  Short 0.00635 p  Short 0.00675 c  Long 0.0068 c	61%	+162.50	-462.50
Short Strangle	Short 0.00635 p  Short 0.00675 c	68%	+575	x
Short Put Vertical	Long 0.0063 p  Short 0.00635 p	87%	+75	-550

 

Christopher Vecchio, CFA, tastylive’s head of futures and forex, has been trading for nearly 20 years. He has consulted with multinational firms on FX hedging and lectured at Duke Law School on FX derivatives. Vecchio searches for high-convexity opportunities at the crossroads of macroeconomics and global politics. He hosts Futures Power Hour Monday-Friday and Let Me Explain on Tuesdays, and co-hosts Overtime, Monday-Thursday. @cvecchiofx

Thomas Westwater, a tastylive financial writer and analyst, has eight years of markets and trading experience. @fxwestwater

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