July 28. Freaking out

–Yields fell in the wake of the FOMC statement, with the ten year yield down 4.4 bps to 151.5.  The curve flattened, with 2/10 down 1.2 bps to just under 79 bps, and the red/gold pack settled at a new (8 year) low of just 45.5 bps.  The FOMC was more hawkish than I expected, noting “…household spending has been growing strongly”.   However, relating to productivity, ”…business fixed investment has been soft”.  The most important line was “Near-term risks to the economic outlook have diminished.” (Or, ‘I guess we got past Brexit unscathed, but…. other challenges are on the horizon’).  In terms of business investment, note that yesterday’s Durable Goods  data was much weaker than expected at -4.0%, though Core Capital Goods (Orders Nondefense Ex Air) were +0.2.  In any case, the Atlanta Fed GDP Now estimate for Q2 was trimmed from 2.4 to 2.3 as a result of the data. 

–Activity after the Fed statement was pretty subdued. Initially, the market ratcheted up odds of a move in September… for all of about five minutes.  FFQ6/FFV6 (Oct/Nov Fed Fund spread), which isolates the Sept meeting, had settled at 5.0 on Tuesday, and immediately popped up to 6/7, but came back to close unchanged at 5.0.  The Nov/Jan FF spread which isolates the December meeting settled 6.0, actually down 1 on the day.  Jan/April, which gives a look to both the Feb 1 and March 15 meetings in the new year, settled at just 3.5.  This last spread is stupidly cheap.  Someone ought to buy it.  You go ahead; I’ll just watch for now.
–I would note that crude took another tumble in spite of a weaker dollar.  In the final analysis, the rally in the long end of the curve, combined with USD deterioration and a bounce in precious metals, suggests that the Fed is powerless to engender inflation.  The historically low rates at the long end are not luring businesses to make productive investments because final demand is not growing organically, but just being prodded along by the central banks.
–The extraordinarily low levels of some spreads is amazing.  If I was writing for Business Insider my headline would be, “EVERYBODY’S FREAKING OUT ABOUT THE EDH18/EDH19 SPREAD AT JUST 13!!”  And if I was a ZeroHedge writer, I might say that “Hillary’s missing emails sparked a $20 dollar rally in gold as trust has evaporated among the disenfranchised.  It’s obvious.”  I will only say that one-year calendar spreads approaching single digits might bode well for financial asset prices, as rates are expected to stay low as long as the eye can see, but are not indicative of an economic resurgence.
–There were some chunky buys in the front contracts yesterday, a couple of 10k blocks bought in EDZ6 at 9910 and 9910.5 and then a late buyer of 40k at 9912.0.  The front end pressure associated with MM reform seems to have passed. 
–Trade number expected $61 billion. Treasury auction of seven year notes.

 

Posted on July 28, 2016 at 5:31 am by alexmanzara · Permalink
In: Eurodollar Options

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