Feb 15. Escalating asset and price inflation

–Rates rose on Yellen’s comments yesterday, as she warned about ‘waiting too long’ to raise rates.  I calculate about 25-28% odds of a hike in March according to March and April FF settle.  The ten year yield rose 3.6 to 246.8.  The green euro$ pack (3rd yr) was weakest on the board closing -5.0, while blues were -4.625 and golds -3.875.  5/30 treasury spread immediately flattened on Yellen’s comments, dropping over 2 bps below 110, but I marked just above 110 at open outcry close.  Stocks pushed to new highs.  EDU7/EDZ7 settled at a new recent high of 16, helped along by bearish option plays in EDZ7 (below).

–Just a couple of additional comments about Yellen’s speech.  She said the committee maintained an unch’d target throughout most of last year “against the backdrop of headwinds weighing on the economy… including financial market stresses that emanated from developments abroad.”  Could stress from abroad stay the Fed’s hand through the first half of this year?  Against this argument, she said “waiting too long to remove accommodation would be unwise, potentially requiring the FOMC to eventually raise rates rapidly…”  Does asset price inflation ever figure into the Fed’s deliberations?   Gives a nod to Trump by obliquely referring to fiscal policy changes “aimed at improving productivity.”

–Headline PPI was a strong +0.6, and the NFIB edged higher from last month’s explosion.  From the report: “The stunning climb in optimism after the election was significantly improved in December and confirmed in January.”  Today’s news, aside from another round of Yellen, includes CPI expected +0.3, Retail Sales expected +0.1, but +0.3 excluding autos and gas, and Industrial Production 0.0.

–Targeted option plays for Fed hikes are still popular, for example late in the day there was a buyer of EDZ7 9837/9812/9787 p fly for 5.5.  It’s a three hike play by the end of the year.  There has also been a decent amount of buying in EDZ7 9825/9800p 1×2.  Sort of makes me feel as if EDZ7 9800p are cheap at 1.5 just on the idea that inflation is already accelerating, and could pick up further steam, notwithstanding all the major economists that say demographic headwinds make such an outcome impossible.

Posted on February 15, 2017 at 5:27 am by alexmanzara · Permalink
In: Eurodollar Options

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