Jan 5, 2018. PAYROLLS…. don’t matter

ADP higher than expected at 250k; today’s NFP expected 190k.  Unemployment rate expected 4.1% with Avg Hourly Earnings +2.5% yoy.  Short end yields continue to press higher, with the market pricing the idea of quarterly Fed hikes more aggressively over the near term.  Two and five year treasury yields at new highs for the move, at 1.95% and 2.267% respectively. In dollars, near calendar spreads made new highs, and deferred spreads at new lows.  For example, Jan’18/Jan’19 Fed Fund spread settled 56.25 and EDH18/EDH19 at 46.0.  However, EDZ19/EDZ20, which is the cheapest one-year spread, settled at a new low of 4.0.  Market trades as if Fed moves will crush inflation expectations and crimp future growth prospects.

–But stocks don’t see it that way.  David Tepper comment yesterday captures the thought, (paraphrasing) “the market almost looks cheap with strong economic growth and low rates.”  And by low rates, I think the broader picture is ‘easy financial conditions’, i.e., low and anchored rates at the long end and tight corporate spreads.

–The longer end of the treasury curve is at new lows.  2/10 marked just underneath 50 bps.  5/10 at 18.2.  5/30 sits just above 50 bps.  Inflation premium is non existent, despite a good run in a lot of commodities…for example BCOM up 6% in a month, since December’s dip.

–New low for employment straddle in TY.  The week-1 Jan 123.75 straddle (expiring today) trade just 17/64’s and settled there ref 123-21+.  Breakeven of 124-005 and 123-155.  Long rates are stuck in cement.

Posted on January 5, 2018 at 5:17 am by alexmanzara · Permalink
In: Eurodollar Options

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