April 18. Policy surprise: Markets don’t believe the Fed

–Interesting speech by Fischer yesterday afternoon ‘Monetary Policy Expectations and Surprises’.  Fischer clearly sees expectations of monetary policy (and of future inflation according to previous speeches) as important determinants of smooth policy transmission.  He references the 2013 taper tantrum as an unexpected market reaction, and implicitly appears to be trying to prepare the market for further removal of accommodation, which is somewhat interesting in light of the recent fixed income rally.  Though Fed officials consistently talk about 2 or 3 more hikes in 2017 followed by balance sheet reduction, the market isn’t pricing things that way.
https://www.federalreserve.gov/newsevents/speech/fischer20170417a.htm
–Yesterday was a light volume day; odds of a June FOMC hike receded and implied vol softened considerably.  July Fed Funds traded as high as 99.00 and settled +2.0 at 98.985, signifying a flip to less than 50/50 odds of a hike (47% at settle).  Premium bids gave way as the weekend passed without major surprises. TYM 126 straddle settled 1’46 having started the morning around 1’51.  Blue May 9787 straddle settled 24 on Friday and was sold down to 23 (23.5 settle).
–The curve steepened a bit (just off new lows last week) as Sec’y Mnuchin said economic growth would be emphasized over the deficit.  The ten year yield rose 2.3 to 225, having traded 220 early.  2/10 treasury spread rose 2.3 as well, to 105.3.  The ten year tip to treasury spread (supposed measure of long term inflation expectations) slipped to a new low of 190 bps.  Since late December this spread had been mostly above 2%, having firmed with other measures of inflation.
–A friend of mine notes that open interest levels in the energy complex -crude, heating oil, rbob – are at records (thanks JJ).  I have attached a chart with crude oil price (in white) and aggregate open interest of 2.2 million contracts (in green).  Perhaps the collapse to new price lows last year convinced producers to hedge more aggressively, or perhaps the emergence of various etfs create arbitrage opportunities by using futures.  I always consider open interest as tinder for large moves, and it so happens that Bloomberg features a story today citing Citi calling for an oil rally.  https://www.bloomberg.com/news/articles/2017-04-18/citi-sees-oil-surging-10-in-season-to-have-faith-in-commodities
–News today includes Housing Starts expected 1.262m and Industrial Production +0.4.

Posted on April 18, 2017 at 5:21 am by alexmanzara · Permalink
In: Eurodollar Options

Leave a Reply