June 27. Fed’s going to have to keep revising growth forecasts lower

–Interest rate futures bounced Wednesday in spite of a mediocre five year auction.  Q1 GDP was revised down to 1.8.  It’s interesting to look at the last few FOMC growth projections.  Last December, the “central tendency” projection for 2013 GDP was 2.3 to 3.0.  In March it was 2.3 to 2.8. In June it was 2.3 to 2.6.  The lower bound is going to have to give way by September.  Maybe they will make it 2.3 to 2.0.  We would now need 2.5 for the rest of the year to hit 2.3, the lower bound.  Not going to happen.  The sequester just kicked in for Q2.  The emerging market collapse just occurred.  It’s likely that rates overshot to the upside.
–Eurodollar calendar spreads are a clear reflection of where the pain was felt.  EDU14/EDU15 one year spread went from 24 to 71 on this sell off (to Tuesday close), a gain of 47 bps.  EDU15/16 went from 49.5 to 105, a gain of 55.5 bps, but EDU16/17 only went up 19.5 bps from 62.5 to 82 and EDU17/18 actually declined from 59 to 53.  It’s quite probable that green/blue calendars will react lower from here, not to levels from the beginning of May but certainly well below 100 bps. Makes sense to look at buying blue euro$ call spreads. Today’s Core PCE price data may provide further support for treasuries if it prints zero again, but if not then Fed speakers will likely continue to try to calm the market.
–The five year auction was at 1.484.  The previous 5 months’ auctions averaged just over 83.5 bps.  Very nearly doubled the five year yield, and indeed April was only 71 bps, so more than double in two months.  Jobless claims may also be important as we approach employment data next week.   Claims expected 345k.

Posted on June 26, 2013 at 5:24 pm by alexmanzara · Permalink
In: Eurodollar Options

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