Feb 15, 2018. The Zimbabwe Rally

February 15, 2018.  The Zimbabwe Rally

–Huge day in fixed income as inflation concerns jumped with yesterday’s 0.5 print on CPI.  Core yoy was +1.8 and Retail Sales were a bit soft (-0.3 vs +0.2 expected), but the remaining piece of the rate rise puzzle had been price acceleration, and this data, along with the 2.9% yoy increase in Avg Hourly Earnings in the employment report was enough to provide a tipping point.  The ten year yield rose 7.4 bps to 291 (and was higher after the floor close).  Fives surged 9.7 bps to 264. The green euro$ pack was weakest on the dollar curve, down 10.625 bps.  All treasury yields posted new highs.  At the 2pm floor close, TYH was 120-105 with ten-yr 290.9.  With DV01 of 74.70 that puts 3% at approx 22/32s lower or 119-205.  In USH, the settle was 142-12 vs 317.2.  The high closing yield mark of 321.3 in 2017 is thus approx. 24/32’s away or 141-20.  (Charts below indicate breakout in 30 yr yield, and a possible confirmation breakout in the ‘real’ ten year yield, the inflation indexed note).
–Surprisingly, stocks ramped up on the day after a brief spike lower on the data.  No good reason for this except for the decline in USD (I refer to Zimbabwe because stocks there exploded higher as a store of value when the currency evaporated).  Stocks are higher again this morning with a weaker dollar; once again there are references to ‘twin deficits’ in the US.  I defer to Paul Tudor Jones: “It is incredible that at full employment we have passed a tax cut that will push our deficit to 5% of GDP. Can you imagine what will happen to the deficit and debt in the inevitable downturn? This is what the dollar is sensing.”

–Huge buyer of EDU8 9762/9750ps for 4-4.5, >150k.  EDZ9 fell 11 bps and (according to prelims) open interest surged 108k.  EDZ8 and Z9 have the most open interest of any contracts, Z8 1.744m (+11k) and Z9 1.678m (+108k).

–News today includes Job Claims, PPI expected +0.4 with Core +0.2, Philly Fed 21.0, Ind Prod +0.2.

–Interesting article by Ambrose Evans-Pritchard yesterday: The Fed Can’t Legally Save the World Financial System in Another ‘Lehman’ Crisis

The Dodd-Frank Act, rushed through in a pageant of self-congratulation in 2010, prevents the Fed from rescuing individual companies in trouble (there must be at least five, and they must be solvent) or lending to non-banks in a panic. It can lend only to “insured depository institutions” through its discount window with the Treasury’s permission. Fed chieftains Ben Bernanke and Don Kohn warned that these curbs were extremely ill-advised. They were ignored…

 30 year tentative breakout and 10y tip yield

https://www.zerohedge.com/sites/default/files/inline-images/ed1_0.jpg?itok=ftYbiNlT

Posted on February 15, 2018 at 5:00 am by alexmanzara · Permalink
In: Eurodollar Options

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