Feb 25. Fed rate hikes? Not so fast…
–“Yellen puts Fed on path to lift rates” is a headline from today’s WSJ. Ordinarily, one might think that yields would have risen given that ‘news’ in the wake of Yellen’s semi-annual testimony before the Senate. However, yields dropped, with the ten year note now back below 2%, at 198.8 late yesterday, down 6.6 bps. And, it wasn’t all due to curve flattening, as 2/10 fell only 1.6 bps to 139. Rates fell across the curve. Specifically relating to Fed policy, note that August Fed funds rose 2.5 (in price) on the day to settle below 25 bps at 99.755, only 13 bps higher in yield than the expiring Feb contract. So, in a simplistic sense one could say that the market is pricing in around a 50% chance of a rate hike at the June or July FOMC. The October contract at 99.645 is almost 25 bps above the current 12 bps fed effective average rate; excluding the next two meetings which are off the table for a hike, there are meetings June 17, July 29 and Sept 17. So call it certainty for 1 out of 3.
–Though treasuries moved to higher atm strikes, implied vol was down. For example, on Monday TYM 127.5 straddle had settled at 3’06, but yesterday the 128.0 straddle closed at 2’63 at 6.0 vol. Previously, given elevated call skew, as straddles moved to higher strikes their absolute values also moved higher. That’s not to say that demand for calls still isn’t evident, as there’s a buyer of TYM 130 c almost every day, adding 8k yesterday bringing open interest to 62k in the strike. It’s simply that upside fear isn’t as pronounced in terms of skew.
–There’s probably more that can be said about Yellen, including her surprise notation (to me at least) that risks from international markets weren’t all in one direction as Central Bank policies could spur growth overseas as well. It’s all about the steady hands of the world’s CBs… But another interesting point was made to me by a friend (thanks DK) regarding labor and wages, specifically that Walmart’s wage increases could spur other companies to raise pay and thus provide more evidence of rising labor demand and increased inflation pressure. I’m not so certain of that conclusion, but I did find an article from mid 2013 noting the largest ten private US employers, of which WMT is the largest at 1.3m domestic workers. Here is the list: http://www.usatoday.com/story/money/business/2013/08/22/ten-largest-employers/2680249/ It’s a bit heavy on fast food and retailers, with Yum Brands, McDonalds, Target, Kroger and Home Depot also in the top ten. But as of 2013 Hewlett Packard was also on the list, with 332k employees. However, a headline on this morning’s zerohedge says that HP has cut 44k jobs to date. (Maybe they can become Home Depot greeters or SnapChat technicians). In any case, given the Fed’s obsession with labor markets, it’s an interesting topic to delve into…and one more point: Obama yesterday vetoed the Keystone pipeline which many claimed would bring needed high paying jobs.
–Today’s news includes New Home Sales expected 471k and the 5 yr note auction. Yellen in front of the House today.
