August 31. Surprise policy path

–Little net change in rates yesterday.  USD strengthened, having bounced against the yen to over 103 from below 100 last week. Today’s news includes ADP expected 175k and Chicago PMI at 55.2.  The big report is Friday’s employment situation, with NFP expected 175-180k.

–Quotes from both Chicago’s Evans and Boston’s Rosengren hint at a faster pace of tightening (Reuters).  Even though Evans appears to be more in the secular stagflation camp he said, “Long-run expectations for policy rates provide an anchor to long-run interest rates. …So lower policy rate expectations act as a restraint on how much long-term rates could rise following a surprise over the near-term policy path.” A surprise over the near term path??  Rosengren is more explicit,

“A somewhat faster move to rate normalization may defer somewhat how quickly we achieve the dual mandate goals of full employment and price stability, but could reduce the risk of a larger divergence from the dual mandate in the next downturn,” Rosengren, a voter on policy this year, said in prepared remarks to be delivered in Beijing.  While Fischer’s comments yesterday morning were met with a yawn, the idea of a slightly more aggressive hike pace seems be in the Fed’s playbook, and clearly is NOT priced into euro$ calendar spreads.

–An interesting side note since Evans and Rosengren were both addressing a finance conference in Beijing, the yuan continues to appear as if could test new lows over the short term (now at 6.68), and China’s ten year bond yield has had a 17 bp jump from last week’s low of 263.   Recall that last August was the Chinese devaluation that sent a shiver through global risk assets; what we are seeing now is more of a slow drip, but at the margin the pressure is the same.

Posted on August 31, 2016 at 5:15 am by alexmanzara · Permalink
In: Eurodollar Options

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