FOMC day

June 19, 2019

–FOMC announcement today.  No change expected in FF target.  The last three statements said “In light of global economic and financial developments and muted inflation pressures, the Committee will be patient…” That language will, of course change, as the market has strongly signaled the need for lower funding costs.  In the March projection plot, 11 members had 2.375% as the appropriate level for FF by the end of 2019.  The other dots were higher.  So, the average is going to come down, but perhaps not the median.  In any case, the market is pretty comfortable in ignoring the dots at this point.

–Interesting session yesterday, with Draghi kicking it off by saying more stimulus might be needed, and Trump following up, accusing Draghi of trying to weaken the euro.  (Well, yes, that is one of the goals and outcomes).  Then Trump announced that a meeting with Xi at the G20.  Finally, it was reported that the White House had looked into ways to demote Powell.  The possibility of a trade deal will certainly keep the Fed on hold for now.  The Fed has already indicated that trade tensions are the primary cause for the slowdown. It would be ironic if Powell kicked the ball back into Trump’s court by saying, ‘we’ll see how the President does on trade talks’.   The longer term prospect of a Trump Fed, which is a low probability event, would result in a massive steepener.  

–Price action yesterday gives a hint about what may come today: weaker in the front and stronger in the back, a flatter curve.  EDZ0 was the weakest contract on the euro$ strip, settling -1.  Reds +0.5, Greens +1.5, Blues +2.75 and Golds +3.75.  Tens fell 2.6 bps to 2.056%.  Implied vol declined with most ED straddles down 1.5 to 2.5 bps.  I expect the statement and presser to lean dovish.  Interestingly, July/Aug Fed fund spread settled -20 (80% odds of a cut at July’s FOMC), but Aug/Oct settled -17.5, somewhat lower odds of a cut at the Sept meeting.–Just a couple of levels from Dec 20, the day after the last hike, until now:
SPX 2467 to 2918, +18%

2yr  2.67% to 1.86%, -81 bps

10yr 2.81% to 2.06% -75 bps

Below is a constant maturity chart of red to gold pack (2nd to 5th year).  With the expiration of June, the packs now begin with EDU20 and EDU23.  Rising trend since the December hike remains intact.

Posted on June 19, 2019 at 5:21 am by alexmanzara · Permalink
In: Eurodollar Options

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