It’s a league game Smokey

July 31, 2019

–Is Powell’s foot going to slip over the line?

–Former NY Fed chief William Dudley wrote in an opinion piece yesterday on Bloomberg that today’s rate cut may not be followed by more.  He cited a concern that today’s move could “erode people’s expectations of future inflation…”  The Fed continues to point the spotlight on quiescent inflation, and on the risks of a global slowdown spillover.  Of course, Core PCE deflator yesterday was only 1.6%.  Is it REALLY all about expectations?  C’mon… anyone that watches political polls knows how fickle opinions can be.  Imagine for a second, that Trump, the master at (mis)directing the narrative, was the head of the Federal Reserve, and his goal was to increase inflation expectations.  I would bet he could achieve it in about ten tweets.

–There is perhaps a 3% chance that Powell goes off the reservation and cuts 50, followed by a ‘one-and-done’ press conference. However, it’s simply nowhere near consensus Fed opinion.  25 is a lock and the entire curve is pretty well priced for it.  If a cut of 50 did occur, I think reds could briefly test June’s highs, i.e. 20 higher than here.  That’s how unexpected I think such a move would be.  

–In any case, the market believes more than one ease is on the way.  FFV9 at 98.065 is 46.5 bps lower in yield than the current Fed Effective.  In other words, 25 now and high odds of 25 in September.  Beyond that, EDU9/EDU0 has gravitated to -50 bps (-49.5s).  As it stands now, the market is pricing the idea of eases now (in 2019) and fewer later.  Interesting to note that EDZ9/EDH0 settled at a new low of -24.5.  This is more about turn-of-year pressure than specific easing, which is apparent from the Jan/April FF spread, which settled -13.5.   

–In terms of global risks, What about Brexit?  Dec19/Dec21 short sterling spread was POSITIVE 30 in May, and is now NEGATIVE 10, a new low.  What about a China deal? Progress is stalled.  What if there is a huge blow-up in Hong Kong?  China PMI’s were soft this morning, with Mfg 49.7 and Service at a new recent low of 53.7.  And, on the domestic front, what if the flood of treasury supply overwhelms demand?  

–Put sales were apparent yesterday, with decent selling in TYU 126.5 puts, settled 12 vs 127-11.  Late in the day there were block sales of 75k EDU9 9775p at 3.0 vs 9782.5 with 30 delta (EXIT). 

–News today includes ADP expected 150k and Chicago PMI expected 51.0.  

–Mark it a zero, Dude.

Posted on July 31, 2019 at 5:13 am by alexmanzara · Permalink
In: Eurodollar Options

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