June 6. Yellen confronts a softer job market

–Friday’s dismal NFP of only 38k sent yields tumbling.  Tens fell 10.7 bps to 170.2.  The red/green eurodollar pack spread fell to a new low of just 20.75 bps (from just over 40 at the start of the year).  Fed speakers that have said two to three rate hikes would be appropriate this year are going to have to change their tune to “one to two” rate hikes.  However, Rosengren spoke today and said he still expects “sufficient economic growth to justify a gradual removal of accommodation” and he noted that, at 4.7 percent, unemployment has dropped to his estimate of “full employment,” a key goal since the financial crisis. (RTRS).  Today, Yellen speaks, and is likely to be non-committal in terms of timing.  Once again, the euro$ curve never bought into the “two to three” rate hike narrative, and as the Brexit vote nears and polls show an even split, June is clearly off the table.  But if there IS a split from the EU, then it’s likely that September will be the next plausible time for a hike…from one hike at every meeting in 2004-2006 to one hike per year, with plenty of hand-wringing about adverse consequences.
–While some will consider this payroll report to be an outlier, David Rosengren notes a weakening pattern: Feb +233k, March +186, April +123 and May +38.  Lael Brainard, in a speech Friday also noted deterioration in the labor market, and expressed concern about inflation goals as well, suggesting the Fed should remain idle.  She talked about inflation expectations, and I would note that the spread between ten year notes and the inflation-indexed ten year fell to a new recent low of 155 on Friday, right about where it started the year (though it was in the 120’s in Feb).  While the decline in the dollar should help commodity prices, the other side of the coin is that it makes things much more difficult for the eurozone and Japan.
–June euro$ midcurve options expire Friday, and EDM6 expires Monday.  I would note that last week as EDM6 was hanging around the 9925 strike, the straddle was 5.25-5.5 bps.  On Friday EDM settled 9933.5, and concern shifted to the 9937 strike.  At least 50k EDM 9937c were bought for 0.25 Friday, but there are still 700k open, with 1.1 million open interest in the underlying EDM6 future.

Posted on June 6, 2016 at 5:23 am by alexmanzara · Permalink
In: Eurodollar Options

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