July 31. Flatlining

–Hard flattener yesterday as 5/30 ended at 133, down 4.6 bps, its lowest level since early May.   Out of the blue, three clients mentioned curve inversion.  How does the curve invert with 2’s under 100 bps?  To this day I remember coming on to the CME floor one morning in the 1990’s and having to cover a curve trade error in eurodollars.  The contract I had to sell just kept going down and the one I had to buy was going up.  I remember thinking I just hadn’t seen anything like it, and was going to have a hard time explaining it to the boss, who had at best a nodding acquaintance familiarity with the curve. The point is, people are starting to get unsettled about how the curve is trading and yesterday was a good example with reds -3.5 and golds +1.875.  Red to blue pack spread settled at exactly 100 bps, pretty low for a two year spread, and a new recent low, as were reds to all contracts behind.
–GDP and revisions were better than expected yesterday, lending additional cover for a rate hike. However, inflation signals just aren’t all that robust.  For example, the 5y5y inflation swap averaged around 280 in the first half of 2014.  For the first 7 months of 2015 the range is 211 to 248.  The midpoint is 229.5.  Yesterday late?  229.3.  Similar exercise with 10 yr breakeven using the inflation index note.  Range this year 154 to 194.  Midpoint 174.  Yesterday 177.5.  Go ahead and tighten.  And encourage further speculative flows as a result of lower rates at the long end.
–ECI is expected +0.6, Chgo PMI 50.8 from 49.4.  In Q1 of 2014, Chicago PMI was around 60.  In Feb this year, it hit the low 45.8.  There hasn’t really been much of a bounce from Q1 weakness.
–Crude oil again lower this morning after a midweek bounce.  AUD at new low.

Posted on July 31, 2015 at 5:14 am by alexmanzara · Permalink
In: Eurodollar Options

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