April 28. Ignore Q1?

–Quiet session Thursday with a bias toward lower yields.  Seven year auction saw solid demand, coming at 208.4 vs 210.6 just prior to auction time.  Ten year yield eased 1.7 to 229.5.

–GDP released this morning, expected 1.1, though the Atlanta Fed revised its forecast to just 0.2%.  The Fed seems prepared to ignore weakness in Q1 growth with a sunny outlook for the rest of the year.  The question is whether they are missing a more fundamental slowdown, given marginal deterioration in credit (autos, credit cards) and declining growth in C&I lending.  And even if that were a concern, top Fed officials voicing it may only be self-fulfilling.  At the ECB press conference, Draghi appeared much less willing to embrace the emergence of growth.

–In the final analysis, we probably have to just take our cues from the market.  For example, everything Trump says is a negotiating tactic, to be taken with a grain of salt.  ‘If there’s a shutdown, it’s Democrats’ fault.’ ‘We’ll rescind NAFTA, but now maybe just alter the edges.’ And…’We’re close to a major conflict with N Korea.’  On this last one, I might dismiss Trump, but I’ll take my cues from the generals (more akin to the market), who say we’re at top military readiness.

–The market is telling us there’s a pretty solid expectation of another Fed hike in June, and smaller odds of another by year end, and then it gets murkier, with the red/green pack spread only hanging just above 1/4%.  In my view, oil and copper are signalling economic concerns.  Although oil bounced nicely off yesterday’s test of March lows, I would suspect that 51 will provide major resistance if we can even get that high.  And with Trump complaining that the Saudis don’t contribute enough to military defense, another supply shock (in the form of Saudi over-supply) could easily occur.  The dollar index is also at a low point for the calendar year; not as willing as the Fed to ‘look through’ Q1 weakness.

–Vol continues to be pressured in rates, with market makers choking on long premium.  Last Thursday, the atm midcurve straddles (0EK, 2EK, 3EK) were 14.5, 20.0, and 21.5.  Yesterday, 10.0, 13.0 and 14.5.  Sharp declines!  But the outlier of course, was last week’s elevated levels.  In late March when there were 2 weeks before expiry for April midcurves, the levels were 10.0, 13.5 and 15.0, nearly exactly where we are now….

–One last note, FT reports that Shibor hit its highest level since April 2015, at a rate of 2.819%, with 3 month 4.3% vs 2.8 six months ago.  Clamp-down on shadow banking.  From the FT:  “China’s premier on Thursday described finance as the “core of a modern economy” [uh-oh] …adding that “accurate judgment of potential financial risks serves as a precondition for maintaining financial security.”

Posted on April 28, 2017 at 5:17 am by alexmanzara · Permalink
In: Eurodollar Options

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