Jan 4. Gamechanger

Jan 4. Early weakness in interest rate futures was sparked by stronger than expected ADP (215k vs 140 exp) which caused some shops to ratchet up today’s NFP estimates (~170-190). The real accelerant was release of the Fed minutes which said that sev’l members wanted to end QE in 2013. Some Fed members are uncomfortable with the gargantuan increase in the balance sheet… I would again point to the Dallas Fed paper outlining the many (loner term) risks of ultra easy monetary policy and conclude that these ideas are gaining credence within the Fed, thereby raising uncertainty about the future path of policy. Given all the efforts made by the Fed to hone communication, this change in tone is a gamechanger.
http://dallasfed.org/assets/documents/institute/wpapers/2012/0126.pdf
–Tens rose 6.5bps to 1.90% to break through the upper end of recent yield range. All eurodollar one year calendar spreads made new highs. However, consider the absolute level of EDZ13/EDZ14 which rose 3 to 24.0. If the Fed were actually to remove accommodation by the end of 2013, this spread should be SUBSTANTIALLY higher. Risk to recent low of 13.5.
–Gold and silver were hammered after minutes and look quite vulnerable to a larger correction. This to me raises important questions. Fed largesse has supported precious metals and stocks. Is weakness in gold a canary for stocks? Will a change in Fed support of QE impact equities more than bonds? (I think so, ultimately). What if we are already in recession now? (as I suspect). When the US is again downgraded, as I think is likely by at least one rating agency, will bond yields take another leg up?
–Clearly US treasuries are embracing the bearish scenario. And of course there are more auctions next week (3, 10, 30). I saw a note that mentioned 1994, when yields surged after the Fed began to tighten following over a year of then ultra low 3% FF. I remember thinking at the time that an increase in rates might spur companies to get off the fence and move ahead with investments/projects. I don’t really think we are in the same environment now, but perhaps worth considering.
–No uncertainty in Japan. Policy makers (Abe) want inflation and a weaker yen, and they are getting it. Yen is getting crushed and Nikkei up 2.8% today. If central bank liquidity pumps up financial assets (as is clear in Japan), then the flip side also bears respectful notice. Even the possibility of an early end to QE entails consequences. Several Fed speakers this afternoon…maybe today’s action WON’T be all over with the NFP release.

Posted on January 4, 2013 at 5:23 am by alexmanzara · Permalink
In: Eurodollar Options

Leave a Reply