February 1, 2018. Macro issues

–It would be completely reasonable to see a dollar bounce from these levels. As shown on chart below, DXY has achieved the 61.8% retrace in an environment where the Fed maintains its tightening bias.  The interest rate curve is also suggesting dollar support, as euro$ back calendars continue to firm.  All one-yr calendars from EDH8/H9 to EDU9/U0 made new highs yesterday (on settlement basis).  For example, EDM19/EDM20 is now 19.0, having risen 10 bps since the beginning of January. (Peak is EDH8/H9 at 58.5 bps).  Previously, the back end of the curve had flattened at the suggestion of further tightening; that’s starting to change.  If the dollar does have a bear market bounce, the impact on stocks is likely to be negative.  The question is, ‘how will fixed income react?’   My opinion is that bonds are now focused on supply issues and potential inflation, rather than equity prices.  As mentioned yesterday, I thought the Fed might upgrade its inflation assessment, and the statement DID note “market based measures” increasing, but softened the message with survey evidence:

“Market-based measures of inflation compensation have increased in recent months but remain low; survey-based measures of longer-term inflation expectations are little changed, on balance.”.
–A concern for my outlook is that 5/30 flattened to a new low of 41.6 bps, and as a result, bond vol was hit. However, blue midcurve straddles maintain a strong bid, as does five year note vol (on a relative basis).  The issue for the Fed is whether or not to lean more aggressively against what Greenspan yesterday termed as ‘bubbles’ in both stocks and bonds. Cleaning up after speculative excess isn’t as easy as the Fed once thought it was…
–Decent amount of news today, including Productivity and Unit Labor Costs, expected +0.7 and +0.9.  Jobless claims 235k. ISM Mfg 58.6 from 59.7, with Prices Paid 68.8.  Highest prices paid over the past year has been 71.5 in September.

–Interesting post from www.themacrotourist.com

which notes that MBS holdings by the Fed haven’t yet decreased as outlined by the QT guidelines.  The reason given is that MBS redemptions were incorrectly modeled by the Fed (wait, what? the Fed’s models are off?).  If so, the adjustment will add more supply at the margin as the Fed tweaks its assumptions.

Posted on February 1, 2018 at 5:01 am by alexmanzara · Permalink
In: Eurodollar Options

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