Reconciliation

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Macro

Last week’s CPI print came in hotter than expected at 8.2% versus the market expected 8.1%. Risk assets dipped immediately after before rallying and ending the week up, implying that the market was over-positioned short going into the event.

Higher than expected CPI coupled with hotter than expected jobs report has all but sealed the fate of the next FOMC meeting at 75 bps, bringing the Fed Funds Rate to 375–400 bps.

This caused short term treasuries yields to spike, steepening the 2s10s inversion.

On Friday, the UK announced they would reverse their mini-budget that sparked the GBP sell-off, soothing risk assets to rally. The rally continued into Monday, as the dollar as measured by the DXY cooled.

The DXY is a geometrically weighted mean to the following, with the pound sterling being the 3rd biggest.

The US announced a ban of US citizens working for Chinese chip firms, severely crippling China’s ambitions in semiconductor dominance. Xi was re-elected to his third term and doubled down on his no-Covid policy, likely leading to more muted growth from China.

Despite many scary headlines about China political tensions, Credit Suisse insolvency, and the risk of nuclear war, market participants still seem rather calm.

Putin’s resolve in the Ukraine war seems to be weakening, saying that conscription would “wrap up in a couple of weekand won’t be extended” (bbg), and regarding missile strikes said “no further such massive strikes are needed for now”.

Markets seem optimistic as S&P is already 5% off its yearly low it made last week.

This week is high stakes as Q3 earnings start rolling in. Monday was a good start with Bank of America coming in better than expected. All eyes on the rest of the week.

Volatility

Bitcoin implied volatility has traded much lower into this week, tracking realized much more tightly.

This has come in the backdrop of historically low realized volatility in BTC.

Skew has also moved to positive territory, possibly marking an inflection point in risk appetite for the asset class.

Interesting trends in equities options on growing market share of short dated options. Perhaps more retail interest in high convexity plays?

Volt Performance

Friktion earned $76,755 last week for its depositors.

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