…Additional Stimulus Will Be Required
June 18, 2019
–Draghi this morning said risks are tilted to the downside and that additional stimulus may be required. New low German bund -28 bps. Treasuries at or near new highs this morning. Stocks higher. Tomorrow it’s Powell’s turn to sweet talk the market – without cutting rates. There is some talk that the Fed will deliver a surprise cut, for example, Jim Grant was on CNBC espousing that view. I’ll believe in surprises from the Fed when Grant appears on tv without a bowtie. The Fed will wait for the G20 to play out. The next FOMC is 6 weeks away.
— Yesterday the eurodollar curve flattened with EDZ9 the weakest contract, -4.5 bps, as market pricing clearly shows there will NOT be a cut tomorrow. Reds -2.625, greens -1.25, blues unch’d and golds +0.625. Tens fell 1 bp to 2.082%. Implied vol eased. Empire State Mfg data posted a startling drop to -8.6, from an expected +11 and previous +17.8.
–There’s a bit more talk about the Fed front-loading eases and then signaling a stop. Sounds good on paper, but that strategy limits future policy options. If Powell refers to this idea without actually cutting tomorrow, it would likely thwart the impact; such a policy has to deliver ‘shock-and-awe’. It would, however, steepen the curve.
