Dec 30, 2016. Happy New Year!
–Yields again moved lower Thursday, with tens down 3 bps to 247.5. Green and blue euro$ packs rose 4.625 bps. While longer yields adjusted very quickly to the upside after the election, it’s somewhat surprising how little is being priced into nearer contracts in terms of Fed activity. Trump is (in my opinion) choosing cabinet members who share his conviction that the US economy can and must release untapped potential. Yet, EDF7, the January euro$ contract, settled yesterday right at the libor setting – 3m libor 0.9979 and EDF7 settled 9900.25. In spite of a couple of large sales early in EDH7 at 9895, the contract settled yesterday at 9895.5. The market is only pricing around 1 in 5 odds of a move in March. There was an article yesterday in the WSJ about new Fed voting members Harker (Philly), Kashkari (Mnpls), Kaplan (Dallas), and Evans (Chgo). Evans is quite dovish, and most analysts characterize the new FOMC as edging a bit more in his direction, which is by no means a certainty. Tarullo, who is probably most involved in banking regulation is expected to leave shortly. The point is that there may be more action in the front end of the curve than the market currently prices.
–On the other hand, the five year note has, just since the election risen 83 bps from 123 to 206. A retracement of 0.382, would be 176 vs current 196. There’s still room for yields to drift lower in the short term even in the context of a bear market.
–Yesterday’s trade deficit was wider than expected at $65.3b. This should slightly trim GDP forecasts for Q4, and is a fresh reminder that global trade uncertainty can easily ratchet up volatility across markets. To wit….
–‘Flash’ move in the euro sent futures to a high of 106.93 this morning, though as of this writing we’re a handle off the high at 105.91 (still up 0.70 from yesterday’s close). Obviously conditions will remain thin today.
–All the best in 2017!
Alex Manzara
