August 3. Steepen even if oil’s weak?

–Yields pushed higher Tuesday, with the ten yr yield up 3.8 at 153.5.  The curve steepened; 5/30 treasury spread posted a new recent high of  121.3 bps, up 3 on the day (strong resistance around 125/126).  Crude oil continues to slide, closing yesterday at 39.51, very near the midpoint of the rally from the low in the beginning of the year, to June’s high.

–Since the BoJ meeting, Japanese yields have surged, with both 5’s and 10’s up around 20-23 bps.  This is somewhat interesting in the context of Dudley’s speech on Monday. “If the econ outlook abroad deteriorates and this causes foreign countries to pursue a more accommodative set of monetary policies, then the dollar would likely appreciate… In this case, the US may need to adjust its own monetary path.   …Therefore we need to be a bit more careful about the risk of tightening monetary policy in a manner that proves to be premature, as compared to the alternative risk of being a little late.  If we were to realize that we were slightly late, policy can be adjusted by raising short term interest rates more quickly.”  In a way, Dudley’s comments are biased toward a steeper curve.  The Fed can’t hike because the USD may strengthen, and a stronger USD is disinflationary.  So, if the actions of foreign central banks cause steepening in their own curves, as with Japan (even if unintentionally), does the Fed follow suit?

–While the front end of the dollar curve remains extremely flat, for example EDZ16/EDZ17 settled 12.0, near new lows, the more deferred spreads are starting to show a pulse.  For example, EDZ18/EDZ19 settled 17.0.  Still extremely low, but given the Fed’s bias as articulated by Dudley, more deferred calendars might be the place to be.

–China Caixin Service PMI was lower than expected 51.7.  US news today includes ADP expected 170k and Non-mfg ISM expected 55.9.

Posted on August 3, 2016 at 5:24 am by alexmanzara · Permalink
In: Eurodollar Options

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