January 15, 2016. The Fed’s policy bedrock: “It can’t go down forever…”
–There’s a lot of news out today including Retail Sales and Industrial Production (estimates at bottom). Also sev’l Fed speakers, Dudley being the most important at 9 EST. I don’t know if Dudley’s comments will be a formal speech, but I looked back on his last speech on November 12 (link below), and at that time, even before the hike, he said that inflation was problematic. He said that China and other EM’s were stabilizing (which hasn’t quite panned out). Here are a couple of direct quotes: “…we have still not seen compelling evidence that a tightening labor market is leading to more rapid labor compensation gains.” “On the inflation side of the ledger, I have greater concerns because we continue to fall substantially short of our inflation objective of 2 percent… There is also some evidence that suggests that inflation expectations are under downward pressure.” Dudley specifically cited the spread between tips and treasuries, and the 5y5y frd inflation measure, both on the chart below, and moving towards the lower left. So if that’s how he felt BEFORE the hike and the tumble this year, how does he feel now?
–Bullard also voiced concern over inflation expectations yesterday, as did Kocherlakota. It’s hardly encouraging that sev’l Fed members have said “oil won’t go down forever” as one of their core reasons for hoping that inflation will ascend. I happen to agree, but the market isn’t so sure, with oil at a new low this morning and stocks getting spanked.
–In US rates, the curve pushed higher, with a solid bid in the front end as reds closed UP 2.375, and weakness further out, with golds DOWN 2.25 and the ten year yield +3.5 bps to 209.8. The big buyer of 0EH 9887/9900/9912 call tree (+1/-1/-1) was active again, paying 3.25; up to 150k bought in the past two sessions (EDH7 9893.0s). Also a new buyer of 40k EDZ6 9950/9962 c spd for 1.5.
–Jan midcurves expire today in eurodollars. Red March is only 2.5 away from the 9900 strike, Green H only 2.5 away from the 9862.5 strike and Blue H has blown through the 9825 strike. It promises to be an interesting session.
–Asia was again weak. From BoJ’s Kuroda: “I don’t have plans for further monetary easing at the moment. But we’re ready to adjust policy without hesitation if there is any change in the broad price trend”. The BoJ’s QE program is falling flat in the face of China’s depreciation. The Nikkei is down 15% since the beginning of December.
Today: PPI expected -0.1 with Core +0.1. Retail Sales 0.0, +0.3 ex-auto and gas, Empire State -4.0, Industrial Production -0.2 from -0.6 last.
Fed speakers, Dudley at 9, SF Williams at 11 and Dallas Kaplan at 1.
Dudley’s last speech:
https://www.newyorkfed.org/newsevents/speeches/2015/dud151112
