Where’s that powder?

July 19, 2019

–The head of the NY Fed, John Williams, threw the market into a tizzy with his speech yesterday, ‘Living Life Near the ZLB’.  Here’s the zinger: [when there are signs of a slowdown] “DON’T keep your powder dry – that is, move more quickly to add monetary stimulus than you otherwise might.”  The market was thus forced to adjust to the very real possibility of a 50 bp cut at July’s meeting.  August Fed funds surged from 9793.5 to 9801, settling +6.0 at 9798.5.  It’s not a perfect proxy, but if we consider the July/August spread for the odds of easing, with a spread of -25 signaling certainty of a cut by 1/4% and -50 a cut of 1/2%, note that we settled almost exactly in the middle at -38.75.  

–The Fed quickly issued a statement to put a damper on the market’s exuberant interpretation.  It’s certainly true that William’s was citing old research, and it’s also the case that we are NOT currently near zero.  So why does the Fed keep talking about zero, or its new politically correct incarnation, the Effective Lower Bound? And why do it just before the blackout period?  The whole, “Fed Listens” initiative to hone communication strategy doesn’t seem to be bearing fruit.  In any case, longs in precious metals and stocks rejoiced. 

–Philly Fed was much stronger than expected at 21.8.  But they’re not taking away the punch bowl, they’re overtly pouring in some grain alcohol.  Let’s party!  Until we black out. 

–I mentioned yesterday that EDZ9 9800 straddle seemed a bit cheap at 28.0, settled 29.5 yesterday.  The guy who has been loading up on long EDZ 9800/9812cs vs 9775p for 0.5 had a nice day,  with a pkg settle of 2.25.  The curve steepened of course, with 2’s plunging  6.2 bps to 1.772% and 30’s  essentially unch’d at 2.57%.  

–Today brings the Michigan survey, which includes 5-10 year inflation expectations, with the last reading at the bottom of the range at 2.3%

Posted on July 19, 2019 at 5:19 am by alexmanzara · Permalink
In: Eurodollar Options

2 Responses

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  1. Written by Actual Trader
    on July 19, 2019 at 7:06 pm
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    Wow dec straddle cheap at 28? Did you buy any 27.5’d today???

  2. Written by alexmanzara
    on August 5, 2019 at 10:53 am
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    By the way, EDZ9 9800 straddle now trade 34.0 ref 98.185….

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