Does growth and employment have anything to do with inflation?
–Final FOMC press conference for Janet Yellen, and true to form, the market bull flattened. As an indication of just how valuable the Fed’s projections are, consider this: 2018 GDP is now projected 2.5%, up from the September dart of 2.1. The unemployment rate forecast was trimmed to 3.9 from 4.1. Yet the inflation projections were unchanged at 1.9 for both PCE and Core PCE inflation. It’s pretty clear that even the Fed doesn’t believe in models linking growth and employment to inflation. ECB up to bat today.
https://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20171213.pdf
–CPI was weaker than expected yesterday morning with Core +0.1 and only 1.7 yoy, down from 1.8. Odds for a hike in March were lessened, with Feb/April Fed Fund spread falling 2.5 bps to 14.0. The was quite a bit of call buying on EDH8 both before and after the FOMC. For example, after the meeting +25k EDH8 9825/9837cs for 3.25. EDH8 settled +2.5 to 9824.5. The largest trade of the day was a buyer of 200k EDG/EDH 9812.5 put calendar for 0.5. Open interest shows a decline of 202k in the March puts and rise of 171k in the Feb; rolling the short puts forward.
–Ten year yield fell 4.5 to 235.6. Red/gold eurodollar pack spread fell 2.625 bps to just under 31.0, near the multi-year low. Implied vol declined with many ED straddles losing 1-1.5 bps. More or less taking out the time value through year end… The dollar fell, providing a bounce in precious metals.
–Dec midcurves expire tomorrow. Retail Sales today expected +0.2; +0.3 excluding autos and gas.
