The CME futures reacted to yesterday’s release of the September Case Shiller indices by performing what we used to call an accordion market. One side (in this case primarily the offers) was unchanged, while the other pulled away (in this case with bids dropping). We’ll see over the next few holiday sessions whether the accordionists who follow this market, can bring the spreads back closer together.
The drop in bids was prompted by more “surprises” to the downside on Case Shiller numbers than to the upside. Using this table as an illustration, the Case Shiller numbers for LAV and WDC were below recent bid/ask quotes, while only LAX ended up coming in higher than the last offer. I view such outliers as “surprises” as any trader with advance knowledge (or great research) who knew the numbers in advance could have profited by hitting the last LAV bid, or lifting the last LAX offer. Since no trader did so, none had knowledge- hence my categorization of these outliers as surprises.
In addition to the outliers, all seven of the other regional indices (so not counting CUS) came in below the mid-market level, thus adding to the pressure on bids yesterday.
While I note that generally bids were lower and offers flat, this didn’t hold completely true across regions and the expiration cycle. The table below shows the changes in the CUS contract. I’ve also posted a table in the reports section (or link here) showing prices sometime the days before and after the release of the Case Shiller indices across all 11 regions. LAX prices held in, or improved slightly. Across expirations, there was support for various Q14 (Aug 2014 contracts) pushing both CUS and LAVQ14 higher on the day. On the other hand, longer dated contracts were bid 5-10 points lower in typical “get me out” fashion. It will interesting to see if longer-dated offers, who have been posting ever lower prices, will chase these lower bids, or if the bids will rebound to narrow the bid/ask spreads.
There were only a few trades in the CUS and LAV markets. The LAVX16 trade was notable in that a) the LAV contract has had little volume, b) the price 149.80 represents a 66% premium over the low March 2012 LAV index value (so May release) of 89.87, and c) was the result of an inter-city spread trade versus CUSX16. (The climb in the LAV futures price also further reflects the importance of having a view and/or understanding of the impact to an index of changes in the percent of distressed sales and the discount on those sales).
The expiration of the Nov 2013 contract brought a huge drop in open interest (to 81) as all of the CHIX13 trades from the last few months rolled off. But as one door closes, another opens, and, per their schedule, the CME rolled out the new Nov 2018 contract. Three regions had two-sided markets in X18 by the end of the day, all consistent with modest increases in home prices versus 2017 quotes.
I hope to populate other X18 markets today, tweak some calendar spreads, and find other ways to bring bid/ask spreads in closer. That said, I expect most thoughts will be on turkey, family and the weather (at least here in the Northeast). Therefore, I will probably look to compile numbers on Mon Dec. 2 for month-month comparisons.
A Happy Thanksgiving to all!