Jan 29, 2018. America first…in a race to higher yields

–Rate futures closed with significant weakness on Friday, and the trend is continuing this morning.  All rate futures at new lows even as stocks indicate a lower open.  Goldman is cited this morning expressing the view that Wednesday’s FOMC may tilt to the hawkish side, with risks being balanced as opposed to “roughly balanced”.  As I mentioned over the weekend, the ten year tip/treasury breakeven was around 1.87% in the week leading up to the December FOMC and it’s now 20 bps higher at 2.07%.  Oil has, of course, rallied from about $57 before the last FOMC to $66 now.

–Near one-year calendars made new highs in eurodollars on Friday, with EDH8/EDH9 closing at 57 bps.  The area from 65 to 66 should be key resistance in this spread.  FFF8/FFF9 closed 66.75, so the 2018 Fed projection of 70 bps tightening in 2018 has now been blessed by the market.

–Today’s news includes Personal Income and Spending, expected +0.3 and +0.5, and there is likely to be additional hand-wringing post-data bemoaning the low and falling savings rate.  However, Core PCE yoy is perhaps more important, expected +1.6 from +1.5.  FOMC and treasury refunding announcement on Wednesday.  The treasury is set to ramp up borrowing to pay for Amazon’s new hub…oops, I mean to pay for the initial shortfall in revenues due to the tax program.  This occurs as Central banks around the world are shifting ever so slightly into a less accommodative stance.  This morning for example, there’s an article on Reuters saying the PBoC is going to increase macro-prudential review of shadow lending.  By the way, Illinois is weighing in with consideration of a $107 billion bond offering in an attempt to plug the pension gap.  It wasn’t that long ago that the entire US annual budget shortfall was only $400 billion….

–Vols had a strong close Friday.  Uncertainty this week is almost sure to be on display this week by a reach for puts.

Posted on January 29, 2018 at 5:21 am by alexmanzara · Permalink
In: Eurodollar Options

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