Jan 5. China’s Wall…under 7 for now

–Fed minutes yesterday indicate a nod toward the possibility that fiscal policies may spur economic growth, requiring the Fed to respond slightly faster.  Not much of a surprise given full employment and market signals of increased inflation.  However, yields were unchanged in front and slightly lower in back, continuing the pre-NFP squeeze to a flatter curve.  New low once again in red/gold pack spread to 76.75. down 1.75 on the day.  2/10 also notched a new low under 122.  FVH7 (five yr note future) has closed near the top of the day’s range for the past five days in a row…there are obvious dip buyers.

–China is crushing yuan speculators today with liquidity withdrawals, with CNY back under 6.89 having been around 6.95.  I guess there will be no devaluation prior to the Lunar New Year (27-29 Jan).  However, efforts to support the yuan are also likely to harm the domestic economy (and note that one of the Fed’s downside risks is weakness abroad). The dollar is softer this morning as are US rates.

–With respect to the Fed and US growth, it’s worth noting that fiscal stimulus has ALREADY been underway.  From Doug Noland, “…the 2016 US fiscal deficit rose a third to $587B, or 3.2% of GDP.  Revenues increased by 1%, while spending jumped 5%.”  From the Fed’s Z.1 data, Federal Gov’t debt in 2015 grew by 5%.  In 2016, growth in the first three quarters: 5.6, 5.0 and 8.2.  M2 expanded by about 8% in 2016.  Federal government juicing was occurring already in the year just ended; there was just no concrete symbol of economic glory and ingenuity that we could point to, like say, for example, a wall.

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

Leave a Reply