When you’re in a (Jackson) hole, stop digging

August 23, 2019

–Dallas Fed’s Kaplan, in an interview with Steve Liesman yesterday from Jackson Hole, summed up the situation, saying that the FF target (2.0/2.25%) is above every other rate on the curve.  Therefore, the Fed is perceived at tighter than we thought.  This observation by Kaplan argues for continued easing, though other Fed officials like Rosengren, Harker and George lean against the idea of further cuts.  Kaplan also talked about the risk management aspect of the Fed’s job, something that Powell will almost surely emphasize today in his speech as he keeps the door wide open for further easing. 

–In terms of risks, the geopolitical landscape looms large.  China’s yuan has made a new low this week.  S Korea has suspended a long time agreement with Japan to share military information, a damaging escalation in the trade war between the two countries.  A story in today’s Washington Post says many administration officials and private forecasters have internally been warning the White House of slowing conditions (which is pretty obvious by Trump’s economic cheer-leading, attacks on the Fed, and proposals to spur growth through tax incentives).   On the other hand, Biden is out there saying the capital gains tax should be raised back to 39.6%. 

–Powell speaks at 10:00 EST.  This weekend also features the G7 meeting, which has become less important.

–In terms of market action, yields rose and the curve flattened.  I marked 2/10 at a fraction of a basis point above zero.  The FF target (EFFR = 2.13%) is above all treasuries: 2y 1.604%, 5y 1.493%, 10y 1.608% (+3.1 on the day) and 30y 2.101%. 

–On the euro$ curve, one year calendars continue to press lower, but interestingly new lows were made in more deferred spreads: EDH0/H1 fell 0.5 to a new low of -30.5, EDM0/EDM1 fell 1 bp to a new low of -19.5.  Once again, this suggests that the market is comfortable with the idea of 25 bp eases (as opposed to a front-loaded Fed response), and that easing will continue in an environment of economic malaise.  I would further note that EDH21 had been the high point on the curve for quite some time, but this week has ceded that honor to EDM21 and EDU21, both of which settled 98.71 (EDH21 at 98.70). The high point is moving back, not forward…  Oct FF settled -2.0 at 98.14, now just 27 bp below the EFFR.  The market has taken away the idea of 50 bp cuts  for the time being.  

–Below is the Gundlach indicator of the Copper/Gold ratio overlaid with ten year yield.  Lockstep lower.

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Posted on August 23, 2019 at 5:08 am by alexmanzara · Permalink
In: Eurodollar Options

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