Dec 25. Merry Christmas

–Mnuchin’s efforts to calm the markets early Monday morning failed.  DJIA -2.9%. SPX -2.7, Nasdaq -2.2 and Russell -1.95.  Now attention has shifted to a possible removal of Powell as Fed Chair.  I am sure every fan of Central Bank independence is imploring Powell not to resign; I am not even sure it would be seriously considered except that RBI’s Patel recently quit and Tim Duy brought up the scenario in a BBG opinion piece.  

–What is unambiguously true is that the market is pushing easier monetary policy onto the Fed.  The Fed will be forced into admitting, quickly, that it has made a policy error.  Jan’19/Jan’20 FF spread closed at 2 bps, telegraphing NO hikes in 2019 as opposed to a Fed forecast of 2 hikes.  EDH19/EDH20 imploded to minus 9 bps.  Odds of a hike at the June FOMC are reflected by May/July FF spread which settled +1.0, the Sept meeting is August/Oct which settled MINUS 1.  All the buyers of near calls and sellers of red and green midcurves have been carried out, as the reds have bulldozed higher to lead the strip.  Consider this: on Nov 8, red June, EDM20, settled 9670, and on Monday it settled 9741.5, a move of 71.5 bps (or nearly three EASES).  On Monday reds +9.625, greens +7.875, blues +6.5 and golds +5.5.  

–What if Trump is able to fire Powell?  Almost certainly the curve would steepen, as term premia would explode and confidence in the treasury market, especially at the long end, would probably evaporate.  Gold is already sniffing it out, with GLD at its highest level since summer, and almost exactly at the midpoint of the year’s range.

–Can the Fed wait for the Jan 30 meeting to announce an end to Balance Sheet Reduction?  Will strong guidance suffice at this point?  The Fed can point to external factors (besides Trump) for a change in course, including huge treasury supply and an oil market which is also in free-fall (WTI down $3 bbl Monday to a new low near $42.50), taking market measures of expected inflation to ever lower levels (10yr treasury/tip breakeven sank to 175 bps on Monday).   Implied vol surged in rates and of course, in stocks.  VIX closed above 36; while it traded higher in the February episode I believe this is the highest settle.

Posted on December 25, 2018 at 8:20 am by alexmanzara · Permalink
In: Eurodollar Options

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