Dec 17. Gradual vs transitory

–The Fed finally hiked, and though the interest rate markets were well prepared there were some notable moves.  Implied vol was crushed in interest rates, down about 0.5 in TYH, and most eurodollar straddles were down 1.5 to 2.5 bps. ATM TYF straddle was 1’04 in the morning but settled 0’52.  The USD strengthened and commodities are pressing new lows this morning.  It’s also worth noting that the Chinese yuan is again weaker, at 6.4837 vs 6.4726 yesterday…new lows from the August devaluation.  Taiwan actually cut its discount rate from 1.75 to 1.625, and Brazil (yesterday) was cut to junk. January crude is nearing $35/bbl this morning.  All related to disinflationary pressures.
–I am trying to determine the difference in time between “gradual” and “transitory”.  As in, the Fed is supposed to raise rates gradually, but factors holding down inflation have been transitory…for at least the past two years.  As Yellen noted in the press conference, oil doesn’t have to necessarily go up to make a positive contribution to inflation, it just needs to stop going down.  In the econ projections, the Fed has Core PCE inflation tantalizingly close to 2% in 2017, at 1.9%, then finally hitting the mark in 2018.  (As a comparison, consider what Putin said, that a price of oil for $50 in the official budget is too high and needs to be adjusted, since it’s already $35). Pragmatism vs hopes and dreams.
–In terms of hard data, Industrial Production yesterday was -0.6%.  Year over year IP is NEGATIVE, having been running as strong as +4% in the latter part of 2014.  Today’s news includes Philly Fed, which is expected 1.2 from 1.9.  Again, for the sake of comparison late in 2014 it was 40.  I know….we’re a service economy now and all UBER drivers, so manufacturing is meaningless.  (On a side note Washington DC is installing more speed cameras and increasing speeding fines up to $1000).  Other news today includes Jobless Claims expected 270k and Leading Indicators +0.2.
–Late yesterday there was a 30k block buy of EDJ 9912/9937/9962 call fly 1x3x2 for 6.5.  On Monday same structure bought in June (EDM) for 4.0.  These trades work if the Fed skips March, leaving June with 50/50 probability…in that scenario EDM should be trading around the middle strike.  If the Fed moves in March, leaving uncertainty for June, the trades could still be net positive.
–One last note.  The Fed is increasing the repo facility to $2T.  For those who are interested, “The results of these operations will be posted on the New York Fed’s website. The outstanding amounts of RRPs are reported on the Federal Reserve’s H.4.1 statistical release as a factor absorbing reserves in Table 1 and as a liability item in Tables 5 and 6.”

Posted on December 17, 2015 at 5:26 am by alexmanzara · Permalink
In: Eurodollar Options

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