August 28. China selling treasury reserves = reverse QE >>>bond yields should FALL

–US interest rates were almost unchanged yesterday despite a 10% jump in oil and a related bounce in stocks (SPX +2.4%).  Q2 GDP was much stronger than expected at 3.7%, though Atl Fed GDP now is tracking Q3 currently at just 1.4%.  Today’s new includes Personal Income and Spending (both expected +0.4) with Core PCE prices +0.1.  The KC Fed’s Jackson Hole Conference has begun.  On Saturday there’s a panel consisting of Carney, Constancio, Fischer and Rajan on global inflation dynamics.
–There’s a lot more press about China selling treasuries, and hand wringing about what would happen in China sold its $1.1 trillion in holdings.  A bit overdone.  Just remember this: in the US, with QE bond buying programs, STOCKS go up and BONDS go down.  Without the overt government purchases, bond yields tended to fall because the economy was seen as fragile, and inflation expectations actually fell.  Yes, $1 trillion is a lot of money.  But why would China completely sell down reserves?  It’s a lot easier to simply let the yuan depreciate, which is disinflationary for the global economy.  To put China’s reserves in another perspective, they’re about the same size is student loan debt in the US, which is in default to the tune of 17%.  What’s the bigger problem?  That China might pare back reserves or that $1 trillion of paper is valued a LOT lower than the government is carrying it?  I think US auto loans are right $1 trillion as well.   Inflation and growth are the main determinants of interest rates; the effects of China selling are likely ‘transitory’, to use one of the Fed’s favorite words.

–Hilsenrath piece yesterday afternoon says many global central bankers and pundits are urging the Fed to hike and get it over with…   Not going to happen in September.

Posted on August 28, 2015 at 5:05 am by alexmanzara · Permalink
In: Eurodollar Options

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