Jan 4. Plop plop fizz fizz. Searching for relief.

–Astounding rally in fixed income with the red euro$ pack (2nd year) +18.375 bps. 5-yr treasury down 13.6 bps and 10-yr down 11 bps to 2.553% at futures settle.  Yields dissipated like the tiny bubbles racing upward from Alka Seltzer dropped in water, but indigestion relief isn’t quite at hand for market volatility, even though there’s a stock bounce this morning.  They used to say. “When America sneezes, the world catches a cold” but now, as has been mentioned by others, it’s China.  AAPL citing the slowdown in China is, of course, a case in point.  

–There are now all sorts of responses to ‘fix’ the problems.  Last week Williams said in an interview that the Fed could end balance sheet reduction.  Kaplan said yesterday he’s open to adjusting balance sheet run-off if needed.  El-Erian was also talking about an end to QT yesterday morning.   Today of course (at 10:15 EST) Powell, Yellen and Bernanke are being interviewed on a panel at the American Economic Assn.  Expect more hints of an end to balance sheet ‘normalization’, along the lines of, ‘we’re now at the lower band of neutral’, that is, trying to gracefully step back.  There are also talks between US and China scheduled next week to address the trade impasse.  China is already taking steps to boost liquidity, cutting RRR by 100 bps, in part to cover needs over the lunar new year.  The powers that be aren’t in panic mode yet, but are throwing out trial bubbles to sooth markets.  

–So what happens if Powell forcefully hints at an end to QT?  Ironically, it would probably be more of a relief to stocks and lead to selling in fixed income.  Adherence to ‘auto-pilot’ continuation will cause stocks to plummet, though that would put more pressure on Trump to solve the trade issue asap.

–Employment data are also released today, but almost as an afterthought.  NFP expected 184k following a strong ADP number yesterday, with a rate of 3.7%.  YOY average hourly earnings expected 3.0 from 3.1 last     

–All near term interest rate calendars now show odds leaning toward ease, and the market is pushing the timetable aggressively forward.  Feb/April FF spread closed MINUS 2 bps, meaning an ease is more likely than a hike at the March FOMC.  Jan/Jan FF spread settled -18 and April/April at -24, so the market is feeling comfortable with the idea of one FF rate cut sometime this year.  In euro$’s, the EDZ9/EDZ0 spread had been the lowest one-year spread a week ago; this has now pushed forward to June’19/June’20 which settled minus 28, now the lowest on the board and down 8.5 on the day.  March’19/March’20 dropped 13 bps to -27!!!!  One spread which notched a new high is 5/30 treasury spread, which hit 54, highest since last February.  

Posted on January 4, 2019 at 5:06 am by alexmanzara · Permalink
In: Eurodollar Options

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