Inflation? Not in commodities.

March 12, 2019

–Yields pushed a bit higher in response to the powerful rally in stocks.  On the eurodollar strip, the red pack (2nd year) was weakest, closing -2.75.  All red to deferred pack spreads made new lows, with red/green (-9.5s) right at the low made in early 2000.  A couple of large trades in euro$ options reflect a continued bias for a slowdown and future Fed easing.  Buyer of 50k EDM0 9850/9875 csll spread for 1.25 ref 9748.5 (settled 1.25 vs 9749.0).  Also 0EU/ 2EU 9775/9812 call spd spread, buyer of the green paying 2.0 over.  Settled 6.0 and 7.75 vs 9754.0 in EDU20 and 9761 in EDU21.

–Prime Minister May won a concession from the EU in an attempt to win today’s Brexit vote, further supporting GBP. 

–US news today includes NFIB (probably higher as Russell index has improved) and CPI, expected +0.2 with yoy Core +2.2.  Ten year auction today as well, followed by 30-yr tomorrow. 

–The bearish implications of last week’s outside ranges with lower closes in equity futures are being challenged this morning, most notably by Nasdaq.  The chart below is SPX divided by the BBG Commodity Index.  It’s a rough reflection of financial speculation.  Paper shares vs things (though perhaps meaningless in an UBER economy).  From the low in late December it’s up 13.9% and within spitting distance of the all time high set in Sept 2018 of 35.23.  As a comparison SPX is up 18.4% from the low close in Dec.  BCOM up under 6% as of yesterday close.  Since the low in 2011, SPX/BCOM is up nearly five-fold!

–I had thought part of Powell’s mission was the 3rd mandate of financial stability, which I interpreted as leaning against financial speculative excess.  Of course, he would also then have to lean against the PBOC, ECB, etc, all of whom want inflation and growth, without any risk of financial asset deflation.  When the liquidity spigots are open, the money flows into paper, not capex.  Maybe that’s why the ED curve is flattening…    

Posted on March 12, 2019 at 4:59 am by alexmanzara · Permalink
In: Eurodollar Options

Leave a Reply