Employment Day

May 3, 2019

–Yields continued to rise as a result of Powell’s more hawkish than expected press conference Wednesday, with red euro$’s down 6.75 bps.  Tens were up 4.5 to 2.55%.  EDU9, which had been solidly bid based on the possibility of a rate cut at the Sept FOMC, fell 3 bps to 9748.0 as calls came under heavy liquidation pressure.  EDU is now only 5 bps above the front May contract.  August/Oct FF spread settled -4, now around 1 in 6 odds of a cut in Sept.  EDZ9/EDZ0 settled -24, up 3 on the day and is still the lowest one-year spread.  The market has gone from the idea of a string of cuts to maybe one over any given year, or maybe nothing.  The withdrawal of Steven Moore as a candidate for the Fed is another loss for those looking for an easy money Fed. 

–Employment data today with payrolls expected 190k.  Average Hourly Earnings yoy expected 3.3%.  Also Service ISM expected 57.0 from 56.1 last.  Prices were 58.7 last and I would expect a lower reading this time.

–Nancy Davis of Quadratic was on CNBC yesterday, a guest whose commentary is generally more sophisticated and nuanced than other guests.  Yesterday she was pretty straightforward.  I am paraphrasing here, but she said ‘the theme in 2019 has been carry, whether that means bonds, credit or selling of premium.  The result has been that volatility has been compressed.  And it’s a concern for the market.’  When yields and spreads continue to compress, there’s much less of a cushion for the market to absorb shocks.  I think the 2018 Powell was trying to re-inject the idea of risk into markets, which leads to higher real rates and actually elevates the neutral rate.  The end of 2018 transformed him in the 2019 Powell: let’s give the party what it wants.  Wednesday he was perhaps trying to get some of the old mojo back…but inflation is not going to cooperate with him.

Posted on May 3, 2019 at 5:09 am by alexmanzara · Permalink
In: Eurodollar Options

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