The Fed as Political Football

August 28, 2019

–The epic bond rally continues with new highs this morning and new lows in most curve measures.  Reuters reports the 30 yr hit 1.906% overnight vs 1.972% at the futures settlement yesterday.  Bonds and ultra-bonds exceeded Sunday night highs, shorter maturities didn’t.  The bombshell William Dudley op-ed on Bloomberg yesterday is a contributing factor; he suggested that if the Fed eases due to Trump’s trade policies undermining confidence and growth, it may further embolden Trump to escalate the trade wars, thus creating a negative loop.  He suggests the Fed refrain from bailing out the administration when bad political decisions hurt the economy.  The Fed subsequently attempted to ice the controversy by putting out a statement saying it adheres to the dual mandate of prices and employment.  However, the argument put forth by Dudley injects another layer of political intrigue and uncertainty regarding monetary policy. In addition, the idea of the Fed now holding steady when the world is clamoring for dollar liquidity risks creating a different negative loop spiral, which could impact the banking system as the curve inverts further.  It’s football season, with the Fed as the new political football.  

–In any case, some markets are now seeing extreme moves.  All near euro$ one-year calendar spreads made new lows, with EDU9/U0 -2.5 to -75.25.  EDZ9/Z0 -4.0 to -56.0.  As we come closer to the Sept 18 FOMC, there is going to be strong dissension as to whether the Fed should ease 25 or 50.  For now, the market is heavily weighted for 25 only (and Dudley’s commentary is part of the reason).  It is still the case that a negative reaction by stocks could provide the cover for a 50 bp ease, but the move would have to be large.  

–Silver and gold are surging due to global uncertainties regarding monetary policy and the underlying soundness of money.  Yesterday Dec Silver was up 50 cents late to 18.29 and Dec Gold +$15 to 1552.20.  The copper/gold ratio broke to a new low, pointing to lower ten-year yields.  The gold euro$ pack (5th year forward) closed at a new high yesterday of 98.6925 or just under 1.31%.  The red/gold pack spread is clinging to a positive level, having closed down 1.25 bps to 8.25, but 2/10 treasury made a new low of -4 bps and was marked -6 this morning. 

–EDZ9/EDH0 3-month calendar spread also hit a new low of -30.5.  EDZ9/FFF0 spread is 30 bps.  Be wary of end of year pressure on EDZ9, especially given new uncertainties.   

–Not much in the way of economic news today.  Five year treasury auction.  
Below is Copper/gold with Ten year yield.

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Posted on August 28, 2019 at 5:21 am by alexmanzara · Permalink
In: Eurodollar Options

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