June 20. Mixed messages from Central Banks and markets

–Here’s a headline from NY Fed’s Dudley yesterday: ‘We haven’t tightened financial conditions very much.”  In a speech a few months ago, Dudley mentioned a few items that indicated tighter financial conditions – short rates, long rates, the dollar, equity values, and corporate spreads.  I have attached a few charts below that highlight some of these conditions.  We all know that the Fed began raising FF in December 2015.  At that time the 10y yield was around 2.29%, it ended yesterday at 2.19.  Easier.  In December 2015 the Dollar Index was 9836, and now it’s lower at 9753.  Easier (helps exports).  And of course SPX was at 2075 and is now 15% higher at 2450.  Easier.  So easy in fact, that the Nasdaq index had traded over 15% above its 200 day moving average, which seems to be an area from which corrections occur.  I would also mention that crude oil closed on new contract lows ytd, down 14% from the start of the year.  Not exactly supportive of the reflation theme.

–In any case, it’s pretty clear that the market and the Fed aren’t on the same page.  There are a few interesting notes from the Fed Fund futures.  For example, Jan’18 to Jan’19 as a spread settled at exactly 1/4%, so that’s the market projection of tightening over 2018 – ONE hike.  The two prices are 98.73 and 98.48.  From last week’s Fed projections, the expected end of 2017 FF rate is 1.4%, and the expected end rate for 2018 is 2.1%, or a difference of 70 bps.  SOMEBODY’S going to have to make up that discrepancy.  But wait (as they say on the TV ads on the channel I watch) THERE’S MORE!  The contracts FFQ18 and FFU18 settled at the exact same price of 9860.5.  The spread market is -0.5/0.0.  Inversion in interest rates??  This particular spread was stable around +5.0 for the first three months of the year.  But when the Fed released its calendar for 2018, the September meeting was later in the month than expected, on 9/26/18 rather than 9/20/17.  The extra week makes a big difference if one is betting on a hiking schedule.  But STILL…. ZERO offer??  This small example of inversion is likely meaningless, but China’s inversion from 1 year rates to 10 year rates is a bit more ominous for growth in Asia.

–A couple of other quick notes: 5/30 traded sub 100 bps but ended right at that level.  Technically weak, but greens/golds actually edged up 0.25 to 0.5 bp.

–Fischer early this morning talked about financial instability and efforts to prevent it, while BoE’s Carney said now is not the time to raise rates.  Fed’s Rosengren and Kaplan on tap today at 8:15 and 3:00.

–Huge buyer EDU7 9837p cov 64.5 0.25 for 100k (short cover). 0EU 9825/9812ps 2.5 paid for 60k ref 38.5. New position.
Posted on June 20, 2017 at 5:22 am by alexmanzara · Permalink
In: Eurodollar Options

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