August 29. Don’t fight the Fed?

–In past history, the market adage was ‘Don’t fight the Fed’.  On Friday, after a small tussle at the release of Yellen’s speech, Fischer was unequivocal about the chance of a near term hike and possibly two this year.  The market took the message and fixed income markets sold off with blue euro$’s (4th year) the weakest part of the curve, down 9 bps.  The ten year yield rose 5.6 bps to just above 163.  However, even with increased odds of a hike having been priced in, there’s plenty of uncertainty about truly trusting in the Fed’s message.  Perhaps that’s because the message has been muddled, perhaps it’s partially because a stronger dollar as a result of even modest tightening will be perceived as a restraining influence on the economy.   My thesis has been that the Fed’s consistently lame expectation for an increase in inflation will finally come to pass this year, due to yoy comparisons in energy, slower global trade that snuffs out price competition through regulatory impediments, and the possibility of fiscal stimulus, perhaps by government plugging the hole of private capital expenditure shortfalls with an infrastructure plan.  Clearly there are cross currents.  China is still fragile and the yuan is again weakening against the USD.  Oil is down again this morning as stability in the energy sector proves elusive.

–In any case, Friday’s employment report will loom large (NFP expected 175k) in terms of cementing rate hike odds.  Today’s news includes Personal Income and Spending, expected +0.4 and +0.3, with Core PCE prices 1.6 yoy.  Also Dallas Fed mfg is released.

–On Friday there was a large buyer of EDZ6 9875p for 0.75, closing as open interest fell 41k.  There was also a large buyer of EDZ17/EDZ19 spread at 26.5.  This appears to have been a roll as Red Dec was down 13k in OI and Blue Dec rose 17k.  The spread settled 28, but if there is a true change in sentiment, just over 1/4% for a two year spread seems quite cheap.  Note that near one-year euro$ calendars made new highs, with EDZ16/EDZ17 up 3.5 bps to 19.  The curve was flatter further out, with 2/10 edging half a bp lower to just under 79.

Posted on August 29, 2016 at 5:10 am by alexmanzara · Permalink
In: Eurodollar Options

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