Chill

–Yields fell and curves flattened as Wilbur Ross threw cold water on a trade deal, the gov’t shutdown continues, and Draghi noted a shift in risks to the downside.  Tens fell 4.3 bps to 2.71% with 2’s down 2.7 bps to 2.56% (2/10 at 15.0).  Blues were strongest on the euro$ curve, closing up 5.75.  Reds to deferred made new lows, with reds/greens now -7.75 bps (that’s year 2020 to 2021).  

–At the start of October Jay Powell said “we’re a long way from neutral”, but by late November had modified his stance to “we’re just below the neutral range”.  Yesterday Ross said we’re “miles and miles” from a trade resolution with China, which, I think, is even farther than a long way.  But I don’t get the sense that Wilbur is nearly as flexible as the Central Bank.  Therefore, the markets look more to the Fed as the only sensible game in town, which is to say, a provider of liquidity.  It seems like the gov’t shutdown is nearing an end one way or another which is likely a net positive, but the main show should be the debt ceiling increase.

–The euro took a tumble as Draghi mentioned downside risks.  Having been above 1.15 in early Jan it’s now at the lower end of its three month range at 1.1330.  EURGBP at the bottom of its range over the past 5 quarters; plunged from .9050 in mid-Jan to .8619 this morning.  Spreads in euribor that had been signaling forward rate hikes compressed.  For example, ERH1/ERH2 closed at a new recent low of 26 (from 29 Friday).

-On the short end of the curve, May/July FF spread closed Friday at 5 bps, indicating an increased chance of a hike in June after a March pause, but yesterday that spread fell to 1.5.  On Friday, EDH9/EDH0 was +2.5 and yesterday settled -4.0.  –Monday brings 2 and 5 year note auctions, with 7’s on Tuesday.  FOMC announcement and press conference on Wednesday. It’s -1 F/ -18C in Chicago.  Time for a brisk walk to the train…

Posted on January 25, 2019 at 5:12 am by alexmanzara · Permalink
In: Eurodollar Options

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