Dec 24. Merry Christmas
–Yields jumped yesterday and the curve steepened, with tens rising 9.5 bps to 225.7 while the new two year note was only up 2.5 to 73. Red/gold pack rose just over 5 bps to 129. Near one-year eurodollar calendar spreads are now above 100 bps, with the peak, Sept’15 to Sept’16 at 106.5. However, more deferred one year spreads are still quite flat, for example Sept’17 to Sept’18 (green to blue) is only 31.5 bps.
–The dollar index yesterday popped above the high from 2009, and is near levels from 2006. By 2006 the Fed had ended its tightening cycle which began in 2004, taking funds from 1% to 5.25%, which underpinned the dollar. Of course, that’s when growth was pretty strong, as GDP in Q1 2004 was 4.5% and in Q2 was 3.0%. Compare that to today, with GDP AT 5 PERCENT!! In terms of unemployment, in June of 2004 the rate was 5.8. It slowly fell throughout the tightening cycle to 4.6 in June 2006. In terms of inflation, 2004 started at 1.7 to 1.9% (pretty close to where we are now), it was up to 3.3 by June 2004 and actually peaked 2 years later at 4.3 in June 2006. Obviously, when looking at the comparisons, it appears that rates should be quite a bit higher now. Yesterday August 2015 Fed Funds are only 99.65 or 35 bps, and there are 5 FOMC meetings prior to that contract’s expiration.
–Shortened holiday session today. January treasury options expire Friday. Today’s new includes Jobless Claims expected 290k, and there is a 7 year auction.
