Nov 28. Powell – we can monitor financial stability as he speaks

–The event of the day will be Powell’s 12:00pm speech to the Economic Club of NY on ‘monitoring financial stability’.  When Dudley was the head of the NY Fed, financial conditions and stability were almost seen as a third mandate for the Fed, now perhaps less important as Powell frequently refers to ‘staying in our lane’ with respect to Congressional mandates, employment and inflation.  Clarida’s comments yesterday were measured and had a slightly more bearish tilt than I expected, though yields ended marginally lower on the day.  Ten year fell 1.4 bps to 3.054% while the 30y bond was only -0.3bp to 3.316.  Also worth noting is that the ten year inflation indexed note at 1.136% is nearing the high of the move which was 1.164.  The spread between the ten year infl index note (tip) and treasury hit a new low of 192 bps.  Both market measures of inflation and economic data (domestically and globally) give Powell cover if he confirms recent market pricing of a less aggressive Fed.  Some think Trump’s criticism could easily make Powell lean against the market, as the Fed’s long term independence and credibility are seen as more important than short term fluctuations in data and stocks.  The market is more inclined to take Powell at his word of monitoring incoming data; for example, EDH9/EDH0 closed yesterday at just 21.5 (-1.0), less than one hike over the forward period.  Guidance on balance sheet normalization pace is key.
–There was a large adjustment trade yesterday, a seller of >150k 0EH 9675/9662/9637p fly 1x1x1 at 4 covered primarily at 9691.0.  On 12-Sept there was a buyer of >150k 0EH 9687/9662/9637p 1x3x2 for 1.5 to 2.0.  Yesterday’s trade leaves the core position long the 9687/9675p spd which settled 5.25 (11.25 and 6.0).  Open interest: 9787p 588k, 9675p 488k, 9662p 1m, 9650p 268k and 9637p 641k. The short analysis is that the target price has moved up from the 9662 strike to 9675 strike, and premium was taken off the table.
–Euro a bit weaker this morning at 1.1289, near a new low.  Strength in the dollar is another factor which could limit inflationary impulses in the US. On/off prospects for the Trump/Xi trade breakthrough are also a major factor; CNY remains close to 7.0 and will probably depreciate through that level if no progress is made.
Posted on November 28, 2018 at 4:55 am by alexmanzara · Permalink
In: Eurodollar Options

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