June 8. Yellen and the data

–Yellen cited four uncertainties in her speech on Monday.  Data relating to two of them was released yesterday.  One was productivity: “A third key uncertainty for the U.S. economy is the outlook for productivity growth–that is, increases in the amount of output produced per hour worked.”  Yesterday’s data: -0.6% and unit labor costs +4.5% (without I might add, much in the way of wage growth).  Another concern was domestic demand: “The U.S. economy has performed better than many others around the globe, and that performance has relied chiefly on the resilience of domestic sources of demand, consumer spending in particular.”   Yesterday’s Consumer Credit data showed a significant deceleration from March’s blockbuster growth.  Revolving from 13.3 to 2.1 and Non-revolving from 8.2 to 5.4%.   Semi-annual testimony is June 21.  I would expect just a tone of increased caution.
–Yields continue to press lower.  US tens ended -1.2 bp at 171.1 in front of today’s auction. German bund fell below 5 bps.  Implied vol on US rate futures is sinking.  I marked Sept bond (US) vol at a new recent low of only 9.7.  With unit labor costs +4.5%, one might think that profit margins would be under pressure, and that stocks would see some degree of negative fall out.  Nope.  Similarly, a continued rally in oil and major commodity indices might be thought to spark a small inflation premium, perhaps in the form of a steeper curve.  Nope.  By the way, one of the other uncertainties for Yellen is how quickly inflation might move back to 2%.  She’s allowing for a year or two…  Let’s assume for a second that two years from now inflation is 2%.  Where should the June 2018 eurodollar contract be?  I don’t know, but I can tell you where it is now: 98.82 or 1.18%, barely 1/2% higher in yield than the expiring June 2016 contract.

Posted on June 8, 2016 at 5:20 am by alexmanzara · Permalink
In: Eurodollar Options

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