Dec 16. Russia hikes rates by 6.5%. US might, just might, go 0.25% next year
–It’s sort of amazing that US traders are wringing their hands over whether or not the Fed removes “considerable time” from its statement tomorrow, leading to a possible 1/4% rate hike SOMETIME NEXT YEAR, while Russia raised its rate from 10.5 to 17.0 late yesterday to stop the ruble’s decline. (It didn’t). Indonesia intervened to halt the slide in the rupiah. Brazil real is making a new low. China HSBC PMI was lower than expected 49.5 vs 49.8 expected.
–US curve flattened further with front end pressure as positioning for US rate hikes continued. New low in 5/30 to 116.5 bps. Red/gold euro$ pack spread (new, using March contracts) fell over 3 bps to a new low of just 127 as reds fell nearly 6 bps. This line is from the Oct 29 FOMC statement, just one and a half months ago: “Although inflation in the near term will likely be held down by lower energy prices and other factors, the Committee judges that the likelihood of inflation running persistently below 2 percent has diminished somewhat since early this year.” Think there might be some modification on that projection?? Let’s see, oil is down 30% just from the end of October. Copper’s down 5%. Emerging market currencies are pretty much in free fall, and China continues to decelerate. The long end of the US market is still a safe haven, and is dismissing all concerns about inflation (for the time being). Isn’t it a little suspect for the Fed to deem levels of inflation below 2% as transitory when the US Ten yr treasury can barely hold its yield above 2% (2.11 at end of the day yesterday).
–It’s pretty clear that Fischer wants a higher fund rate, in order to normalize policy (in a very un-normal world). But what if he is overruled by the doves? If “considerable time” stays in, there will likely be an immediate short cover rally in reds and greens. My preferred way to play for a continued dovish Fed is to buy deferred one year euro$ calendar spreads, for example March17/March 18 at just 47.5 bps.
