July 26. Now is the Summer of our discontent….made worse

–Settlement prices were obsolete about ten minutes after the floor’s closing bell as Hilsenrath apparently put out a blog suggesting that the employment threshold could be lowered before the Fed contemplates hiking the FF rate.  The blue pack, under early selling assault of 2k lot block trades, had settled -5.375, but rallied 6 bps post bell.  Tens, which were a bit over 261 during the day went down to 257.  (Total open int in euro$’s surged 88k with reds accounting for over 70k, but the blues fell 14k).
–Some of the selling was connected to Summers being considered the instant front-runner as new Fed chairman, and comments that he had made (reported in the FT) that “QE in my view is less efficacious for the real economy than most people suppose.”  Further…”Mr Summers gave a highly optimistic outlook for the US economy – even more so than the Fed’s recent forecasts – saying the risks to growth are significantly to the upside.”
–All recent Fed forecasts concerning growth have been too positive, and the potential new Fed chief thinks risks are to the upside?  Huh? Why? because rates have jumped, or because the EU is going to roar back?  After yesterday’s durables number, several shops lowered Q2 GDP estimates because shipments of non-defence cap goods (ex-aircraft) fell 0.9.  So JPM for example, went from +0.9 to +0.7 for their GDP est and I saw other sub 1% estimates.  Just for review, in Dec the Fed’s est for 2013 GDP was 2.3 to 3.0.  In March, 2.3 to 2.8.  In June 2.3 to 2.6.  If Q2 GDP is 1%, then Q3 and Q4 will have to be over 3% just to hit the lower target of 2.3.  Not going to happen.
–There has been significant political blow back to Obama’s consideration of Summers for the Fed, with Senate Democrats sending a letter urging that Obama choose Yellen.  While the current Fed stance argues for curve steepening, sales of the back end based purely on Summers as new Fed chief are questionable at best.
–With the Fed de-emphasizing QE and moving more toward forward guidance of FF as its main policy tool, it makes sense for the eurodollar curve to steepen.  But the main message is that funding will remain cheap as far as the eye can see.  At least that’s what I think will come out of next week’s FOMC.

Posted on July 26, 2013 at 5:22 am by alexmanzara · Permalink
In: Eurodollar Options

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