The Fed Folds
March 21, 2019
–The Fed effective rate is 2.40%. As of floor close yesterday, both 2’s and 5’s were lower at 2.398 and 2.334. Three month libor is around 2.60. The ten year yield as of floor close was 2.537. The first nine 3-month euro$ calendar spreads settled negative (inverted) [thanks DK]. EDZ9/EDZ0 is still the most inverted one-yr eurodollar calendar at a new low settle of -25.5, although it’s now tied with EDU9/EDU0, which plunged 8 bps to also settle -25.5. Previous low settle in EDZ9/Z0 was -22.0 which was near the height of stock market worries on Jan 3. On that date, TYM9 had settled 123-135; yesterday TYM9 settled 123-13. Even though stocks have rebounded in Q1 as have inflation expectations, the Fed went all in on stimulus, removing the prospect of rate hikes and ending balance sheet reduction in Q3. Ten year note to tip closed at a new recent high 197.6 bps, again nearing 2%.
–When big trades used to hit the floor, the local community’s common refrain was “That guy knows something [that we don’t]” Does the Fed know that something ominous is around the corner? The ‘real’ rate as displayed by the ten year inflation-indexed note fell 9 bps to 0.56%. Last year it had surpassed 1%. Last year Brainard said in a speech that the neutral rate WAS GOING UP as the Fed raised rates. Now I guess it’s going down.
–Here’s Powell from last October, saying the economy’s great and everything is rosy. https://www.reuters.com/article/us-usa-fed-powell/powell-u-s-outlook-remarkably-positive-with-low-unemployment-tame-inflation-idUSKCN1MC2A7
Then Q4 hit and the Fed’s psychology has flipped. Doesn’t really instill much confidence. If things are good, why is the Fed once again trying to drive the investment community into risky assets? What if that plan backfires?
–Gold is up $16 this morning at $1318/oz and Palladium’s at another new high with the June contract around $1570. 5/30 ended at the highest level since 2017 at 64 bps. Red/gold ED pack spread also notched a new high at 15.625, up 2.5 on the day. The Fed has implicitly communicated a plan to let inflation “run hot” which should encourage the steepening trend at the long end. Although USM closed decisively over 146-16 resistance with the 30y under 3% yield at 2.974%, a further drop in yield should lag the rest of the curve. The Fed announced maturing MBS will be invested in treasuries. The Fed doesn’t hedge MBS. The private market does. At the margin, there should be more volatility at the longer end.
–News today includes Philly Fed expected 4.8 from -4.1. Jobless Claims 225k. Leading Index +0.1%
–In yesterday’s note, I said I thought Powell and the Fed would lean against renewed strength in the stock market and strike a more hawkish tone. As Ron White would say. “I was wrong”
on March 21, 2019 at 5:46 pm
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Just wanted to say I appreciate your daily write-ups. I don’t fully comprehend the Eurodollar markets nor the jargon you use, but what I do glean has been very helpful in my equity trading. I learned what Golds and Greens are at least!
I read several things before the open everyday, and your blog is the first thing I read to get my head in the currency and debt space.
Once again, thanks for your commitment to writing.
@Pyrognosis on twitter.
on March 24, 2019 at 1:25 pm
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Thank you. It’s sometimes said that rate markets are “smarter” than equity markets. I am not sure that’s true, but I do know they sometimes give conflicting signals. It seems to me that the large caps are much more inclined to trade off liquidity signals from central banks, rather than economic growth, which is what the financial press mostly focuses on. In that sense, it’s worth looking at rates and curves and corporate spreads to provide additional input to your equity market signals. Thanks for reading.