Pre June CS #’s

The Case Shiller index #’s will be released on Tuesday morning.  At no time in the last five years have I seen as much positive news priced into the front contract (relative to the spot index).

The graph to the right shows the bid/mid/ask quotes on the 11 Case Shiller futures contracts (for August) that are traded on the CME.  Between bullish home buying anecdotes and strong seasonal factors, the markets are “looking for” index price increases of between 4.2-8.5% over the next three months (using mid-market quotes).  (NYM is the weakest while SFR is the strongest).  How much of that increase is reported in Tuesday’s release will probably drive quotes in the August contracts later that day.

Uncertainty about the magnitude of the expected “pop” in index levels has probably resulted in the wider bid-ask spreads and limited trading seen over the last several weeks.  (I mentioned in a LinkedIn write-up that any bid/offer order flow gets imbalanced when expectations all line up the same way.  While many traders can recall the absence of bids in the down markets of 2008-2010, the reverse has been true over the last few months, i.e. there have been fewer offers.)

(I would also note that several bid/ask spreads were tighter last week but (as often happens) traders tend to pull orders or widen quotes in the days before the Case Shiller release.  This bar chart reflects those wider bid/ask spreads).

I expect this market to remain dormant until Tuesday morning at which time there might be a strong reaction to any unexpected index releases.  Reporters can prepare their headlines now, in that the index results will be strongly higher.  How much will drive August quotes.

As always, if you have any questions about these contracts or any aspect of housing derivatives, please feel free to contact me (