July 16. Yellen endorses a rate hike, yields slip

–Once again Yellen said that a rate increase this year would be appropriate, but yields slipped with tens down 5 bps to 235 and fives down 3.7 to 162.3.   This, in spite of higher than expected PPI of +0.3 and +0.8 Core (wholesale egg prices up 84.5% in June).  Industrial Production was also slightly better than forecast.
–There was a large trade early in the day embracing the idea of just one rate hike by year end that would peg 3 month libor to around 50 bps: buyer of 70k EDZ5 9937/9950/9962c fly vs selling 9925p for a one tick debit (max profit at the 9950 strike).  However, the fundamental reasons to justify a move by the Fed appear to be eroding.  For example, late in the day crude was down 158 to just 51.50.  EUR closed on its low of 109.50. (Both look like they will test the year’s lows). Canada cut rates, taking its currency to a new low versus the dollar.  The dollar index closed at its highest level since early June.  Greece erupted in riots (as its current gov’t accepted the deal that even the IMF doesn’t think is sustainable).  And Chicago raised its sales tax to 10.25%.  On top of that, the White House cut its growth forecast to just 2% for this year and projects CPI of just 0.2% for the year.
–Where the market and Yellen appear to be in sync regards the prospect of GRADUAL rate hikes.  The peak one year euro$ calendar spread is March’16/March’17 which is only 80.5 bps, down 3 on the day.  Most one year calendars are around 75 bps, indicating just three rate hikes in any given year.  Option prices are compressing, in line with modest projections on central bank policy.  FVU straddle is again nearing 3% vol, having been around 3.7 a couple of weeks ago.
–News today includes Jobless Claims expected 285k.  Philly Fed expected 12.0 vs 15.2 last.  Also TIC data.

Posted on July 16, 2015 at 5:08 am by alexmanzara · Permalink
In: Eurodollar Options

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