…Additional Stimulus Will Be Required

June 18, 2019

–Draghi this morning said risks are tilted to the downside and that additional stimulus may be required.  New low German bund -28 bps.  Treasuries at or near new highs this morning.  Stocks higher.  Tomorrow it’s Powell’s turn to sweet talk the market – without cutting rates.  There is some talk that the Fed will deliver a surprise cut, for example, Jim Grant was on CNBC espousing that view. I’ll believe in surprises from the Fed when Grant appears on tv without a bowtie.   The Fed will wait for the G20 to play out.  The next FOMC is 6 weeks away.  

— Yesterday the eurodollar curve flattened with EDZ9 the weakest contract, -4.5 bps, as market pricing clearly shows there will NOT be a cut tomorrow.  Reds -2.625, greens -1.25, blues unch’d and golds +0.625.  Tens fell 1 bp to 2.082%.  Implied vol eased.  Empire State Mfg data posted a startling drop to -8.6, from an expected +11 and previous +17.8.  

–There’s a bit more talk about the Fed front-loading eases and then signaling a stop.  Sounds good on paper, but that strategy limits future policy options.  If Powell refers to this idea without actually cutting tomorrow, it would likely thwart the impact; such a policy has to deliver ‘shock-and-awe’.  It would, however, steepen the curve.    

Posted on June 18, 2019 at 5:14 am by alexmanzara · Permalink
In: Eurodollar Options

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