Heading to lower libra rates. It means ‘free’

July 11, 2019

–Explosive steepener yesterday as Powell highlighted uncertainties and risks to future growth and inflation.  The two year note plunged 8 bps to 1.824% while tens were unchanged at 2.06% and bonds actually rose 3.2 bps to 2.57%.   On the euro$ strip, whites rose 7.375, reds +4.625, greens +1.5 blues -0.375 and golds -1.875.  While these moves were dramatic, they came after a flattening move in the wake of the stronger than expected employment report, so many curve measures are now more or less in the middle of the last month’s range.  For example, 2/10 ended at 23.6, up 8 on the day, but right back where it was in the beginning of July, prior to NFP.   

–Everything I read in the prepared text solidified the idea of an insurance cut of 1/4%.  Business investment is weakening and housing decelerating, with global trade tensions accentuating risks.  However, odds of MORE than a 25 bp cut at the end of the month rose significantly.  On Tuesday, July/August FF spread settled at exactly -25 bps, but yesterday this spread plunged to -31.25 as Aug FF rose 6.5 bps to 9792.0 or 2.08%.  CNBC highlighted the number of times that Powell said “uncertainty” (25x) and the market apparently feels the need to hedge against the chance of 50.  Further back, the Nov/Jan FF spread settled unchanged at -12.0, indicating a 50/50 chance of a 25 bp cut at the December FOMC.

–Stocks were, of course, buoyed by the prospect of increased liquidity.  Implied vol declined in the front end, for example, EDZ9 9800 straddle went from 32 on Tuesday to 30.5 yesterday.  

–Today’s news includes CPI, with yoy Core expected 2.0%.  Powell continues his testimony.  And the treasury auctions 30 year bonds, which were yielding 2.57% late yesterday, not quite 20 bps above the current Fed Effective rate.  Also worth noting is the rally in oil yesterday, as CLQ closed +260 at 6043.  It’s up a bit more this morning, due to a draw down in inventories, a storm in the gulf, and an Iranian attempt to stop a UK tanker in the Straits of Hormuz.  Would a surge in oil to new highs be inflationary or a risk to growth?  Yes.  Probably not supportive of the long end of the curve in any case.  

Posted on July 11, 2019 at 4:47 am by alexmanzara · Permalink
In: Eurodollar Options

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