Policy making for disaster

April 10, 2019

–Ten year yield slipped back under 2.5%, down 2 bps to 2.497 with an auction today, followed by 30’s tomorrow.  Today’s news includes the ECB meeting, CPI and the Fed minutes.  CPI expected +0.4 with Core +0.2 and yoy Core 2.1%.  Stocks encountered profit taking yesterday.  AAPL finally had a down day after closing higher 9 days straight; it’s now just a shade above the 61.8% retracement from the high in the beginning of October 233.47 to the low in early Jan at 142, which is 198.53.  The rally has taken nearly the same amount of time as the sell off.  Nasdaq has retraced nearly the entire sell off.

–Regarding the Fed minutes. we already know that policy is now ‘patient’ and that the market leans toward easing as the next move.   

–Fed Vice Chair Clarida gave a speech yesterday evening about the Fed’s efforts to review policy tools and communication.  Once again he bemoaned the low neutral rate, which is expected to persist, as a complicating factor making it more likely to revisit the Effective Lower Bound in downturns, which in turn makes the Fed’s job more difficult.  He then posed three questions: 1) Should the Fed employ ‘make-up’ policies for previous inflation shortfalls? 2) Are existing policies adequate or should the toolkit be expanded? 3) How can the Fed’s communication policy be improved?  Ironically, this speech, which is about communication, perpetuates downside risks and the Fed’s seeming inability to combat them.  The old adage is, when you find yourself in a hole, stop digging. Perhaps the key is less hand-wringing communication and more confidence. 

–Yesterday, a large euro$ market maker put out a note about extreme call skew.  As an example, with EDZ9 9751.5, the nearly equidistant 9800 calls settled 3.5s and 9700 puts at 0.5.  The same is true in midcurves.  EDZ9/EDZ0 settled at -27.5 (already indicating an ease).  EDZ0 settled 9779, near the peak price on the ED curve.  On the call side, 9825c settled 9.0 and 9837c at 7.0, while 9725 puts settled just 2.75.  This pricing is a reflection of underlying concerns in Clarida’s speech:  There is no fear of the downside, and moves to counter economic weakness may have to be significant.

Posted on April 10, 2019 at 9:45 am by alexmanzara · Permalink
In: Eurodollar Options

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