It was a weird, bullish, lonely day in watching the CME housing contracts in the hours after the Case Shiller numbers for March were released this morning. Press coverage tended to focus on the decline of year/year index gains over the last 12 months, while the CME contract prices jumped (at least on the offered side) as most the the CUS 10-city components bucked seasonal trends with strong month/month numbers that were outside the range of expiring May ’14 quotes.
The chart above shows the CS #’s released this morning (in the line Mar-14). Nine of the ten components of the CUS 10-city index came in at (DEN) or higher than the offered side of the expiring May 2014 (K14) contract (all highlighted in green on the same line). Only the NYM index was lower.
This bothers me in that with more eyes watching (and hopefully understanding) home price indices, I would expect that the contract quotes at expiration would incorporate all home price information (including technical revisions to indices) and that the index levels would tend to fall within the expiring contract’s bid/ask spread. There have been times in the past when all 11 index numbers fell within bid/ask spreads (and in this case the May ’14 bid/ask spreads were not unusually narrow). This is an extreme outlier the other way (with only 1 of the 10 regions falling inside the quoted spread.)
This set of “surprises” (defined in past blogs) led to two quick trades (and one later in the day), sharply higher offers (e.g. 5-6 points on some longer contracts) and much wider bid/ask spreads.
The silver lining to these “surprises” is that it should encourage analysts to sharpen their pencils going into contract expirations. Someone with insight on the WDC index level (205.81) could have made >$450/ contract lifting the 204.0 offer on Friday -and BTW they traded at 203.4 earlier that day). While revisions are sometimes responsible for price gyrations, I don’t see any such revisions this month.
The other major puzzle today is that I’m frankly still trying to get my head around how the technical revisions to the CUS weightings played out in arriving at the 181.43 index value for the CUS 10-city index. ( I confess that I need help understanding this, so I’ll ask what may be a dumb question. A simple weighted average of the CUS10 index using the new components would result in a 182.22 index. Using the old weights gives a 181.59 value. Is the CUS10 index no longer a weighted average of the ten components? Does anyone have a numeric example of how one arrives at 181.43 while incorporating the new weights?)
Both of these themes played out with very little involvement from other traders. I saw only a few instances of better bids/lower offers as the day played out. With the dramatically wider bid/ask spreads from today’s close, there’s a lot of work/help needed to narrow spreads back to last week’s levels.
Beyond those two puzzles, the trend of CME markets reflecting ever-more bullish levels, while the pundits focus on the slowdown in HPA growth continues to play out.
This graph of the CUS10 contract shows the mid-market prices for the CUS contracts (those outstanding at the time -with linear interpolation) at year-ends of 2011 (red dashes), 2012 (black dashes), and now 2013 (purple dashes). The rise in futures prices from Dec 2013 is more than technical revisions, as many of the reference contracts continue to rally. Net, the bears may get the best press, but the market reflects ever higher expectations.
Feel free to contact me (johnhdolan@homepricefutures) with any questions – or better still this month – answers to the issues raised here.