March 1. New month and new odds of a Fed hike March 15.

–It’s now all about a rate hike at the March FOMC which is just two weeks away, as Williams (SF) said that meeting was under “serious consideration” and Dudley followed up by saying the case was more compelling for a move in the near term.  March FF traded to 9925 indicating 72% odds of a hike, with April at 9919 at more like 66%.  This evening Brainard speaks with Q&A to follow, she has generally leaned more dovishly.  Front June eurodollars were also crushed, making new lows at 9867.5, having taken out the post-election low which was made in December (9869).  Other contracts have not made new lows yet, and the question becomes, ‘if the Fed hikes in March, then will the market finally begin to price the back end of the curve as if 3 or 4 hikes are possible in any given year?’  EDZ7 contract has been bouncing around 9840 to 9850 recently, consistent with the idea of two hikes by year end.  Late yesterday that contract traded 9838.5, down to 36.5 this morning, a fairly decisive break of the range.   However, the Fed also seemed to be taking pains to set the market up for a hike in September 2015, which they ultimately passed on.  Brainard tonight and Yellen on Friday can cement expectations… or not.

–EDZ7 9850 straddle traded 27.0 earlier in the week, with one massive trader repeatedly saying that front vol was wrong in this environment,  That straddle settled 28 yesterday, with the underlying contract already having fallen 14 bps from Monday’s high.  If odds of Fed moves are re-calibrated then front month vol will do the same.  In the same vein, near treasury vol firmed vs June, as immediate US monetary policy considerations outweigh French elections…

–2/10 treasury spread made a new low at 114.4 by the close of open outcry and declined another 2 bps in late trade.  In the early part of the session there was a large buyer of EDM7 9887/9875/9862p butterfly 5.25, which was trading 4 late in the day vs 9868/68.5.

–News today includes Personal income and Spending, both expected +0.3.  Core PCE prices were +1.7% last (the Fed’s preferred inflation gauge, and the last one that seems to be moving).  ISM also released, with Beige Book in the afternoon.

–Stocks are up this morning, basking in the afterglow of Trump’s speech, USD also stronger.  However, I would also note that bitcoin, the alternative currency, is also at new highs, flirting with 1200.

Posted on March 1, 2017 at 5:27 am by alexmanzara · Permalink
In: Eurodollar Options

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