June 7. Rate hikes pushed back

–A lot to talk about for a quiet Monday.  Before the employment report, July/Aug FF spread was 10/10.5.  On Monday it traded down to 5.0/5.5 and settled 5.0.  So not only were the odds of a June hike swept away, but July’s odds were halved.  However, August to October, which isolates the September FOMC, rallied from 5 to 6.5.  So now the odds of September are going up.

–The chart below is the Fed’s Labor Conditions index which is at the lowest level since 2009 at -4.8.  Obviously, this chart gives credence to the soft data seen Friday.  Yellen’s comments were on the dovish side, noting the decline in the neutral rate, and saying that policy is stimulative, though not as stimulative as might appear at first glance.  She concludes that “…the federal funds rate will probably need to rise gradually over time.”  Probably and gradually.  Let’s buy stocks.
–Also worth mention is strength in commodity indexes in general, and the grain complex in particular. July Corn was up another 9 cents yesterday, and is the highest since late July last year.  A gradual Fed and softer dollar supports commodities.
–In her list of uncertainties, Yellen identified global risks associated with China and Brexit.  I would think that another sharp depreciation of the yuan would cause a repeat of the start of the year.  But the timing is uncertain.  However, the UK referendum result will be known on June 24.  In the middle of February the first red euro$ traded to 9937.5.  Would Brexit spur a similar rally in US rate futures?

Fed Labor Cond

 

Posted on June 7, 2016 at 5:20 am by alexmanzara · Permalink
In: Eurodollar Options

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