Aug 1.

Aug 1.  Stunning rally in fixed income Friday with both 5-yr and 10-yr notes falling about 15 bps to recent lows after much weaker than expected Q2 GDP report. 5-yr yield 1.37 and 10-yr to 2.80%. Eurodollar calendar spreads absolutely collapsed to new lows.  For example EDH12/EDH13 closed at only 29.5 bps.  In my opinion, these spreads are entirely too low, pricing in complete economic disaster.  EDH2/EDM2 settled at only 3.5; I am a buyer.  The rally was perhaps more about weak growth than about debt ceiling or european problems. In fact as of this writing Sunday evening, it appears there is a debt ceiling deal, but fixed income has barely sold off in spite of a solid bounce in equities.

–Forecasts by the Fed and other private economists were for growth of around 3.5 to 4% in 2011.  Now it looks like like there is simply no chance of that, even if some of the factors restraining output were transitory.  Furthermore, if the Fed is so completely far off on its forecasts, how can we really be sure monetary policy is anywhere close to the right trajectory?

–Employment cost index surges +0.7 in Q2 due to benefits. (Reuters) “Benefits costs, which make up about 30 percent of compensation, grew 1.3 percent in the quarter, the biggest gain since June 2007. Wages and salaries expanded by 0.4 percent in the second quarter after increasing by the same amount in the first quarter.”  The only place you can spend benefits is on health care…  But wage growth of only 0.4% is not the answer to robust consumption in an economy where deleveraging is still the dominant force.

Posted on August 1, 2011 at 12:32 pm by alexmanzara · Permalink
In: Eurodollar Options

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