June 1. Black sea, black swan

–Friday’s revision of GDP to -0.7 wasn’t much of a surprise, and was actually slightly better than expected.  However, Chicago PMI of just 46.2 was much lower than expected.  Could it be that Illinois/Chicago fiscal troubles are beginning to take their toll?  From BBG: “Chicago won a partial reprieve from its pension burden Sunday, as the Illinois General Assembly cut by more than $200 million the city’s required 2016 payment into underfunded police and fire retirement systems.”  It’s not clear that the governor of Illinois will go along with this plan to kick the can further down the road.  Illinois spreads are widening.
–Oil was up over $2.50 bbl Friday in part due to fires in Alberta that are impacting oilsands production.  Oil sands extraction directly accounts for 2% of GDP, but total energy extraction and support activities account for 6% of GDP, BAML says.  Expect it to shave 0.1 to 0.3 off GDP, with an even more deleterious effect if the fires continue.  http://business.financialpost.com/news/economy/the-alberta-wildfires-that-are-shutting-down-the-oilsands-could-wallop-canadas-gdp   According to BMO consensus estimates for Canada GDP in 2015 have fallen from about 2.5 to below 2% recently, with BMO’s est at about 1.5%.  The Canadian $ is weaker this morning against USD, as are all currencies, with EUR back near 109.  EM currencies remain under pressure, (for example the Mexican Peso has been weakening all year with USD/MXN closing in on the year’s high of 15.67.
–What do you call a black swan that anyone that scans the news can see as clear as day?  Tensions between the US/China and US/Russia continue to escalate.  From ZH: Russian military aircraft were scrambled to head off a US warship acting “aggressively” in the Black Sea.  China continues to build islands as military installations in the South Sea in disputed territory.  It would seem that US military assets are spread a bit thin.  China official PMI today was 50.1, just barely showing growth.  Are military exercises a good distraction for underlying economic malaise?
–US data includes Mfg ISM expected 51.8.  Friday’s market action featured weak stocks and a flatter curve.  Ten year yield fell 3.5 bps to 209.5.  Red/green euro$ pack spread made a new low of 61 bps, down 1.375 on the day.  The range this year has been around 51 to 72, so right about in the middle.  Euro$ one-yr calendar spreads remain low and stable, suggesting very gradual rate hikes.  The Fed’s last “dot plot” in March showed an expected FF rate of around 3.2% in 2017.  The 2017 euro$ pack averages to a price of 98.27, a rate of 1.73, more consistent with FF target of around 1.25 to 1.5%, around 175 bps lower than Fed dots.  The market has become more comfortable with a terminal rate of around 2%.  By the way, the Fed’s estimate in March for 2015 GDP was 2.3 to 2.7%, which itself was a downgrade from December’s guess of 2.6 to 3.0.  With H1 looking like zero growth, how much lower will the Fed project Q1 GDP?

Posted on June 1, 2015 at 5:21 am by alexmanzara · Permalink
In: Eurodollar Options

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