Aug 28. Bernanke Jax Hole address Friday; Dallas Fed paper notes limits on “ultra easy” policy

–Quiet Monday. Interest rate trades continue to be biased toward lower rates and a flatter curve following Fed minutes last week, and in front of Bernanke’s Jackson Hole address on Friday. For example there was a new buyer of 20k Gold Oct (4EV) 9850/9875/9900c fly for 4.5 (ref 9835.0). Red/gold pack spread eased to 124, down 3.375 bps. Ten year yield fell 3 bps to 165.
–Chicago Fed’s Evans unsurprisingly favors further immediate easing and unlimited bond buying, and would risk inflation up to 3%, on risks from Europe and the fiscal cliff. However, the Dallas Fed just released a paper noting unintended costs of unconventional easing, underscoring a rift within the Fed. “The conclusion is that there are limits to what central banks can do.”
–ZeroHedge cites David Rosenberg on Core Capex (yoy 3 month moving avg) having moved into negative territory at -1.7%, often a precursor of recession.
–Crude oil fell yesterday as talk resurfaced about releasing supplies from the SPR, though it’s rebounding this morning.
–Today’s news includes Consumer Confidence expected 65.8 and Richmond Fed. Two yr auction today followed by 5’s and 7’s Wed and Thur.
–Just a couple of longer term thoughts about deleveraging in the US economy. From Flow of Funds Consumer Credit reports, the only true decline has been in Home Mortgages, which went from a peak of about 10.6T in 2008 to 9.75T now. Consumer Credit which peaked around 2.57T in 2008 is now near that level at 2.54T. Business debt is at record highs (11.9T). The real change of course has been in Fed’l Gov’t debt levels, which doubled from the first half of 2008, from 5.3T to 10.8T in Q1 2012. So a decline of less than 1T in household debt was “plugged” by 5.5T of gov’t debt, of which about 2T has ended up on the Fed’s balance sheet… Additionally, while it’s a positive that the Financial Obligation Ratio for households (debt service as % of Disp Pers Income) has fallen from 18.3 in 2008 to 16 now, it’s partially due to substitution effect of lower cost student loan debt for credit card debt, which may or may not be a long term positive.

Posted on August 28, 2012 at 5:07 am by alexmanzara · Permalink
In: Eurodollar Options

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