Coherent Arguments (and credit acceleration)

April 12, 2019

–It’s off to the races this morning with a new high in ESM above 2900.  WTI crude has likewise erased a large part of yesterday’s decline, now +87 at 64.45, but not quite at a new high.  Apparently better than expected China export data and strong credit growth is contributing to the euphoria.  According to Bloomberg, China’s broad M2 growth was 8.6% and Aggregate Financing was 2.86T yuan vs expectations of 1.85T.  Global stimulus.

–However, gold has only recouped about 1/3rd of yesterday’s $18 drubbing (GCM9 trading 1296 late).  BCOM (BBG Commodity Index) had spent a couple of days above the 200 dma, but fell well below it yesterday.  Implied vol in rates was pounded as the world embraced a theme that Kudlow vocalized. “Rates may never rise again in my lifetime.”   With 43 days until expiration the atm TYM9 straddle settled 1’04, less than 14 bps.  USM9 148^ settled 2’18, more like 12.5 bps. 

–There was an interesting quote from Brainard from an interview yesterday, “FOMC listens to fact-based, coherent arguments.”  I assume, though I didn’t see the interview, that she was referring to things like MMT and the gold standard.  In any case, here’s a couple of arguments from the latest Q2 2019 Hoisington Review:

“Federal debt accelerations ultimately lead to lower, not higher, interest rates. Debt-funded traditional fiscal stimulus is extremely fleeting when debt levels are already inordinately high. Thus, additional and large deficits provide only transitory gains in economic activity, which are quickly followed by weaker business conditions. With slower economic growth and inflation, long-term rates inevitably fall.”

“The 2018 pattern is consistent with econometric studies that show that large increases in government debt boost the economic growth rate for a few quarters, but the overall effect is negative by the end of three years.”

–Earnings reports today from JPM and PNC Financial pre-open, with Wells announcing at end of day.

Posted on April 12, 2019 at 5:19 am by alexmanzara · Permalink
In: Eurodollar Options

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