Jan 12, 2018. ECB sentiment shift

–PPI lower than expected yesterday at -0.1%, but the driving factor early in the day was ECB news that forward guidance may need to be reconsidered given continued reflation.  European bonds immediately sold off.  However, US rate futures regained early losses and closed up on the day.  CPI today expected +0.1 with Core +0.2, and yoy Core +1.7.  Retail sales expected +0.5.

–There were a couple of surprising buys late in the day.  For example, +20k TY week-2 (today expiry) 123c for 13 ref 123-02 (settled 16 vs 123-04).  Also a buyer of 10k 2EF 9762.5c for 0.25 ref 9755.0.  Jan midcurves expire today.  Just prior to last week’s employment data there was also a large buyer of expiring in the money calls.  I would suggest someone is running a large short in tens and buying protection to cover risk prior to important econ releases.

–EUR soaring this morning both as follow-thru from yesterday’s ECB shift and due to Merkel making a deal to form a coalition.  US stocks continue to march to new all time highs.  Crude oil a bit lower this morning after its recent surge.  Friend AOK notes that the energy junk bond spread is at a new record low.  At the start of 2016 when oil was crashing the spread was over 8.5%, now its 3.25%.

–Interesting speech by Dudley yesterday.  Positive on medium term growth prospects due to the tax bill, but concerned that the US debt situation is unsustainable over the longer term.

“Over the past decade, the sharp decline in short- and long-term interest rates has kept a lid on debt service costs—that lid is now being lifted.”   “Although the future path of interest rates is highly uncertain, the most recent 10-year projections of the Congressional Budget Office (CBO) illustrate where debt service costs are heading.  For example, the CBO projects that debt service costs in 2027 will be more than $800 billion—nearly 3 percent of GDP, more than double their current share.”
Posted on January 12, 2018 at 5:25 am by alexmanzara · Permalink
In: Eurodollar Options

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