The complacency of prices in the CME contracts got a mild shock yesterday with the June release of the April Case Shiller indices. Prior to Tuesday there had been no trades in June (that I was aware of) and very few meaningful price changes. That changed when the S&P announcement of the Case Shiller numbers revealed weaker than expected (by the market) results.
(While use of the contracts in longer-term hedging is a goal, the reality is that the bulk of trades currently take place in the front contracts. As such, I’m going to focus my comments there.)
The table below shows historical CS indices (available prior to Tuesday morning, so without any revisions), bids, offers and mid-market levels for the Aug (Q14) contract from Monday’s close, and then mid-market levels for about 3:30 on Tuesday afternoon. With the exception of the BOS and CHI contracts, most Q14 contract prices ended up lower on the day.
The red horizontal bars in the candle graph to the right show how much (on a percentage basis) of the difference between the May (release) index levels and the (higher) August mid-market contract prices was eaten away by the June (release) CS #’s.
Now I’m not arguing that a linear interpolation between May and August is what the market should expect. Between seasonal factors, momentum, and the impact of moving averages, getting from May index levels to Aug mid-markets is not a straight line.
In addition, there’s nothing that says that the Aug contract prices are correct. That said, if the market believes in Aug prices, CS indices somehow have to get to Aug levels from May.
As the graph indicates the impact of the June numbers ranged from near zero (NYM) to ~50% (BOS) of the difference between May and August mid-markets. Checking back to the first table, BOS contract prices jumped, while NYM (and LAV, LAX and SDG) sagged. Net – new information (the June CS #’s) resulted in a shift in market prices.
Again, these are just observations and I will leave it to others to opine on importance of seasonal factors, momentum, etc.
I would highlight that not only do the BOS and CHI contracts have the highest % gains priced in, but those were the two contracts that traded yesterday.
Net, Aug ’14 prices are consistent with an expectation that journalists will be reporting that “Case Shiller index levels increased this month” for the next few months.
I’d be happy to discuss my interpretation of these 3 illustrations in more detail, or to hear from those that have views that are outside the price forecasts implied by the August contract prices. Feel free to contact me (firstname.lastname@example.org).