June 13. FOMC…. a bearish hike?

–Today brings the FOMC announcement, with near 100% expectation of a rate increase.  Focus will be on the change in wording, perhaps to something like “the stance of policy remains MODESTLY accommodative.”  Reuters cites Goldman in this snippet:

The last time such a change occurred was in September 2005 when rates were raised from 3.50 percent to 3.75 percent, “into the range of (neutral) estimates” given by Fed staff at the time, Goldman Sachs analysts noted.

The phrase “policy remains accommodative” was merely removed, with no substitute language or explanation.

[Note that the move to 3.5% at that time was about halfway through the hiking cycle]

–The same might occur here, with the line “…FF rate is likely to remain, for some time, below levels that are expected to prevail in the longer run” removed entirely.  I think this meeting will also incorporate a rise of only 20 bps in IOER.  However, the projection ‘dots’ may be a bit more bearish, with the 2018 end-of-year projection moving to 2.2 or 2.3.  The inflation projection could move higher as well.

–In another twist, late yesterday it was reported that Powell is thinking of having press conferences after every meeting, which caused an immediate bid in odds for hikes at non-quarterly meetings.  For example, there was a large buyer of Jan’19/Feb’19 FF spread which traded up to 3.5 but settled +0.5 at 3.0.  Same with Oct’18/Nov’18 (meeting on Nov 8), which traded up to 3.0, settling +0.5 at 2.0. Overall, I think it’s likely to shake out as a hike with a more bearish tilt.  If so, pressure on emerging markets may ratchet slightly higher, and the curve may flatten a bit more.

–A few quick notes from yesterday’s action: buyer of 50k EDN8 9750p for 3.0; open interest increased by 25k, EDU8 settled 9751.5.  Large new buyer of TYQ 120c which settled 27 vs 119-13, with new open interest of 37k.  Yields were little changed on balance, but I would also note that blue midcurve straddles are now nominally BELOW greens.  About a month ago, blues traded at a premium of 2.5 to 3 bps.  Example, 2EZ 9687.5^ settled 52.5 and 3EZ 9687^ settled 52.0.  A new buy of 36k 2EU 9700p for 17.5 (17.75s ref 9695) might have been a factor.  In any case, taken together, large trades and small adjustments in spreads indicate a bias toward flattening.

–PPI expected +0.3 with yoy Core +2.3.  Yesterday’s NFIB small business optimism was 107.8, record high, through the 2004 high of 107.4.

Posted on June 13, 2018 at 5:26 am by alexmanzara · Permalink
In: Eurodollar Options

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