The July release of the Case Shiller numbers for May were slightly lower than “suggested” by quotes in the Aug 2014 contracts from the day before. As such, CME quotes fell (but bid/ask spreads were much tighter) by the end of the day in all but one contract (LAV).
There was only one trade in the SFRQ14 contract.
The table below shows CS indices for the 3 prior months * (*-note indices have been updated to show revisions -which were relatively small), CME prices before Tuesday morning, and then prices later on Tuesday.
Mid-market levels on all contracts were lower by the end of the day. Note that some contracts (e.g. DEN, LAV, LAX, and SFR) had higher bids. However, offers in each of these contracts came down more than bids rose, resulting in the decline in mid-market levels.
The combination of higher bids (on some contracts) and lower offers (on all) resulted in average bid/ask spreads contracting from 3.2 points to 1.3. The widest bid/ask spread when trading ended was 2.0 points. Both the 1.3 average and the 2.0 maximum are relatively tight for ~30 days before contract expiration. Open interest in the Aug ’14 expiration is 18 contracts (across 7 regions). Between those “interested” parties and tight bid/ask spreads, there may be some better chances for trading over the next month.
The bar chart below shows a comparison of the July (release of CS( #’s versus the June release and August mid-market contract prices from the day before.
The red horizontal bars in the candle graph to the right show how much (on a percentage basis) of the difference between the June (release) index levels and the (higher) August mid-market contract prices was eaten away by the July (release of the) CS #’s.
There were only two CS indices (LAV and LAX) that were ~50% of the difference between June indices and Aug mid-market levels.
While one shouldn’t expect a straight line between index releases (given momentum, moving averages, and seasonal factors), the notion that the BOS, CHI, SDG and WDC indices were <1/3rd of the June index/Aug mid-market spread seemed to immediately put downward pressure on Aug CME prices (particularly offers). The four indices just mentioned were the four contracts with the biggest declines in mid-market values.
Looking forward the August (Q14) contract levels are consistent with further upside in the Case Shiller index levels across all regions over next month (and again looking further ahead to Nov ’14). All contracts (except SDG) are consistent with 1-2% gains in index levels next month.
(My next blog will focus on Aug ’14/Aug ’15 spreads and implied HPA. Tease: one year forward for CUS index is 5.7% (using mid/mid prices).
The BOS and CHI contracts no longer look like the outliers that they were last month (although CHI remains the contract with the biggest “expected” index gain for August.
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 (email@example.com).