Sept 15. Theory vs Reality

–Yields fell yesterday with the ten year easing 4.3 bps to 168.9.  However, the curve continues to steepen as shorter maturity yields fell faster.  This month’s move in the 5/30 spread has been spectacular, running straight up since the beginning of the month from 103 bps to yesterday’s 124.7.  2/10 treasury spread was 75 bps at the end of August; it ended yesterday at 93.5.  These moves are indicative of longer term bottoming price action.

–Interestingly, the November to January Fed Fund spread declined 1.5 bps yesterday to 8.5, trimming odds of a December hike to around 1 in 3, partially in response to a drop in oil of over 1.30 yesterday to 43.58.  Next week brings the FOMC and BoJ meetings.

–There is a lot of economic data today, including Empire State expected -1.0, Retail Sales expected -0.1 and ex-auto and gas +0.3.  PPI expected +0.1 both headline and core.  Philly Fed 1.0.  Industrial Production -0.2.

–Here’s a line from Bernanke’s latest blog, a discussion of negative rates vs higher inflation targets.  “Comparing a strategy based on a higher inflation target with the use of negative rates is natural because, as just mentioned, they work through the same channel. Economic THEORY suggests that aggregate demand (consumption and investment) responds to the real rate of interest, which is the nominal (market) interest rate minus the public’s expected rate of inflation.”  This points out the main problem with central bankers and models.  In theory, consumption and investment respond, but in reality, the public loses confidence in an environment of negative rates and central banks that appear to be out of touch.  There’s a joke about the difference between theory and reality…oh, just look it up Ben (though you might not understand it)

Posted on September 15, 2016 at 5:20 am by alexmanzara · Permalink
In: Eurodollar Options

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