A series of 25 bp cuts, or a 50 shocker?

August 21, 2019

–Yields declined as stocks pulled back yesterday, with tens falling 4.5 bps to 1.555%.  Euro$ strip from reds through blues were +3.5.  New lows posted in the near one-year calendars:  EDU9/U0 fell 3.25 to -71.75, EDZ9/Z0 fell 1 bp to -49 and EDH0/H1 eased 0.5 to -28.5.  Today, minutes from the last FOMC are released.  The decline in one-year calendars, along with Fed Fund calendar spreads, indicate that the market is becoming more comfortable with a series of 25 bp cuts, rather than a front loaded response featuring a 50 bp cut at the next meeting.  For example, the Aug/Oct FF spread rose to -30 (+1.25 bps), while Oct/Nov fell 1.5 to -19.0. and Nov/Jan fell 2 to also settle -19.0.  While these moves are most likely simple adjustments in front of the minutes and Jackson Hole, they reflect a more steady easing cycle.  That is, these spreads are all moving closer to 25 bps.   

–The average Fed Effective rate in August so far is 2.128% and Aug FF settled at 97.87.

–There was a new buyer yesterday of >70k TYU9 131.75c for 4 to 5/64’s yesterday.  Settled 3 vs 130-235, open interest rose by 62k.  These calls expire Friday (Powell speaks Friday at Jackson Hole) and are about 12 bps away.  At the 2pm futures close I marked cash tens at 1.555%, the low yield in July 2016 was 1.36%, so the market could still get to that strike without making a new low yield. There was also buying yesterday of EDZ9 9825/9850c 1×2 for -0.5 (took small credit to buy the lower strike).  Fear remains in the upside; that’s the only reason this trade is doable (it settled 0.0, 15.5 and 7.75).  

–At Trump’s press conference yesterday, it seemed to me that he talked about the China situation in past tense.  I think Trump is now quite keen to make a deal with China, but China is unlikely to budge at this point.  If a deal proves elusive at the upcoming talks next month, then I think the Fed will cut 50 as stocks again falter. 

–Existing Home Sales today. 

Posted on August 21, 2019 at 5:14 am by alexmanzara · Permalink
In: Eurodollar Options

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