Sept 20. Market continues to digest Fed’s inaction….
–Adjustments continued in the fixed income arena in the wake of the Fed’s decision to stand pat. After a large flattening of the euro$ curve immediately after the Fed, a stealth steepening crept back into the market yesterday, in part a reaction to strong data (Philly Fed soared to 22.3). For example, late Wed the EDU15/EDU16 spread traded 103, having settled at 118.5 Tuesday and reached a high for all one-yr spreads of 122.5 in late Aug. Yesterday it edged back up to 109.5. Currently, the peak one year spread is EDZ15/Z16 which closed yesterday at 111.5. While calendar spreads edged back up, implied vol was hammered. Long dated red and green straddles fell 3.5-4.5 bps. For example EDM5 9912^ was 71.0 Wed, but 67.0 yesterday. EDM6 9812^ 130.5 to 126.0.
–Not much in the way of economic news today but there are several Fed speakers including George, Kocherlakota and Bullard (12:55 NY time).
–The dollar continued to weaken with a new high in EUR and dollar index making a new low, but emerging currencies continued to recover, lessening EM crisis risk. India surprise hike of 25 bps today to 7.5%.
–Immediate risk to the market concerns the debt ceiling fight but perhaps Obamacare is also a headwind as more companies announce plans to change employee healthcare status (Home Depot today, adding to Walgreens, Trader Joes, etc). My guess is that such announcements, even though they may not affect huge amounts of the labor force, have a restraining influence on consumption plans as healthcare is something like 17% of GDP.
–13 people were shot last night in Chicago. While pensions and employee health care costs are regularly cited as the reason for municipal deficits, part of what caused Detroit’s demise was flight from violence. If you want to read something a lot more compelling than Fed speeches today, here’s a fascinating article (thanks Slayer) http://www.bloomberg.com/news/2013-09-17/heroin-pushed-on-chicago-by-cartel-fueling-gang-murders.html
