Dec 28. More fiscal cliff drama

It’s all about fiscal cliff negotiations now. The bigger picture is what will happen when agreement is reached. Since August tens have been in a range of just below 1.6% to around 1.85, having tested 1.84 earlier this month. We are now in the middle with yesterday’s close of 1.72. Many are looking for an upside breakout to higher yields. I suppose fiscal agreement could lead to a sustained stock rally (though I am skeptical), and certainly labor data is somewhat better with Jobless Claims of 350k pretty much at the year’s low. Housing continues its recovery. However, inflation expectations are stable, at least if gold is considered a barometer. Perhaps a lack of confidence in US debt could spark a bond sell off, but I would think that would happen in France before the US, and ten yr yield there remains around the low of year just below 2%. Only with strident yen bashing has the JGB yield started to notice, moving from 72 to 78 bps.
–There are a few signs of economic strength, for example FT notes that iron ore prices have surged 60% in four months (improvement in China), and Port of Long Beach in CA reports Nov volumes up over 20%, though for the first 11 months of the year imports are -0.3 and exports up only 2.0. But Baltic Dry Freight Index has recently dropped again and is bouncing around yearly lows. Consumer Confidence plunged to 65.1 versus expected 70, finally moving in the same direction as small business confidence, which has been sinking. It just doesn’t seem as if there’s enough evidence to argue for a sustained rise in yields…
–Chicago PMI today expected 51.0 from 50.4.

Posted on December 28, 2012 at 7:40 am by alexmanzara · Permalink
In: Eurodollar Options

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