Feb 14. Is it a ‘reflation’ trade or an easy credit trade?

–Yellen will be the main event today.  I find myself agreeing with DB’s LaVorgna …the Fed is close to achieving the dual mandate, but likely won’t jawbone for a March hike.  On the inflation side of the mandate, it’s worth a mention that the NY Fed survey found consumer expectations of 1 year ahead inflation rose to 3.0% and 3 year ahead to 2.8%.  One inflation indicator after another has indicated acceleration, though perhaps modestly.  So even if Yellen comes out on the dovish side, underlying inflation pressures should continue to put a floor under rates.  Additionally, every one-year euro$ calendar spread from Sept17/Sept18 on back is below 50 bps; further compression will be hard to come by barring an exogenous event.

–Early this morning the NFIB small business optimism survey will be released.  As shown on the attached chart, it exploded after the election, a good indication that that small business feels that regulation and related uncertainties have been shackles on growth.  PPI also released this morning.

–The other chart below shows EEM and HYG and BCOM.  From this chart it seems as if credit considerations are more important than commodity ‘reflation’ to emerging markets.  If central banks DO turn more aggressive in terms of paring back stimulus, there are going to be a lot of adjustments.

–However, vol is low is both stocks and bonds.  April ten year vol (TYJ) traded sub 5% yesterday, which is at the low end of the range.  Near vol has been pressured relative to deferred, in part because of calendars being entered as a play on the French election (selling premium expiring before the initial vote on April 23 and buying thereafter).  Today, Reuters notes that France 10’s converged to Ireland, with a nice running start to Portugal.  (Reuter’s didn’t have the part about Portugal, that’s my contribution).

Posted on February 14, 2017 at 5:18 am by alexmanzara · Permalink
In: Eurodollar Options

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