June 8. Political risk eases but economic growth concerns linger

–Political risk in US equities appears to have lifted as Comey’s remarks were released.  However, crude oil plunged over $2/bbl yesterday to its lowest settlement price of the year.  At the end of 2015/beginning of 2016 it was the oil market that threw high-yield into turmoil, however, few signs of trepidation are evident from hi-yield etf’s (just slightly lower yesterday).  In 2007, China’s Li Keqiang, said he preferred to look at just three measures to get an underlying sense of the Chinese economy as most data was sketchy.  Those items were electricity production, rail car loadings, and bank loans, and became known as the Li Index.  Although oil was reacting to a build in inventory, I would say that its price reveals something about the US and global economy (like electricity production).  Yesterday, Consumer Credit was released for April and showed an annual growth rate of just 2.6%, with non-revolving at 2.8%.  This data is somewhat analogous to bank loans, and indeed C&I loans at US banks have also slowed considerably.  In terms of rail car loadings, I don’t have data handy, though I would note that Federal Express made a new all-time high yesterday, at odds with other indicators.

–ECB and the UK election also on tap, with the ECB expected to nudge growth estimates higher but trim forward inflation expectations.  Hence, no policy change.  In terms of Fed policy, July Fed Funds are essentially fully pricing a hike next week.  EDM7/EDZ7 settled just under 16 bps and FFN7/FFF8 at 13.5 bps, so it appears as if the market considers another hike by the end of the year (after June) at just better than 50/50.  Beyond that, the curve remains quite flat, though peak one-year ED calendars managed once again to poke above 30 bps.  EDZ7/EDZ8 +1.5 to 31.0.

Posted on June 8, 2017 at 5:19 am by alexmanzara · Permalink
In: Eurodollar Options

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