March 17. Just as inflation is turning, the Fed has self doubt

The Fed is belatedly coming towards the market view of growth and inflation just as inflation may have turned the corner.  Somewhat interesting that as the Fed downgraded the 2016 inflation assessment, the spread between the ten year and inflation-indexed note spread made a new high at 159, highest since early December and 40 bps off the Feb low.  Median dots dropped to 0.875 in 2016 and 1.875 in 2017.  While EDZ16 closed at 9910, in the same ballpark as the Fed’s projection, EDZ17 closed 9877, more consistent with a FF rate of 1% to a bit higher.  So the dot plot year-over-year spread is 100 bps, but Dec’16/Dec’17 is only 33 bps.
–There were some large put exits in euro$’s on early morning weakness in futures, for example, a seller of 60k EDU6 9900/9875 put spread at 6.0 (open int fell 97k and 65k).  This trade was an exit of the top put spread of the 9900/9875/9850p fly, and there were other related exits as well.  Good timing, as near interest rate futures exploded higher on the Fed’s announcement.  Fives and tens made new lows early, had outside days and closed on the highs (and are higher yet this morning).  Big steepener as the 5 yr yield (at the 3:00 pm floor close) was down 7.8 bps, while tens fell just 2.2 and bonds actually rose 1.3.  The 5/30 treasury spread, which had been making new lows around 124 snapped back to end at 132.7.
–Dollar weakness is not likely to help the other central banks.  EUR has been in a range of 105 to 115 for the last year and a quarter, and is last near 113, testing the upper range of the band.  Not good news for Draghi.  Also unwelcome for Japan with $/yen below 111.50 and ZH reporting that Japan’s exports to the US dropped by the most since 2011, and total exports were down 4%.  While the Fed chose to highlight global risks based on China, the dovish stance unwittingly created new pressures on the EU and Japan.
–Precious metals exploded higher with gold up nearly $40 from the low, though still shy of last week’s high.  Today’s news includes Jobless Claims, expected 270k, Philly Fed -1.4 from -2.8 last, JOLTS and Leading Indicators expected +0.2.
–With inflation measures turning up, and oil benefiting in part from a weaker dollar, the Fed’s announcement was an engraved invitation to buy the curve.  Red/gold pack spread rose 6.625 to just over 79 bps.  The low has only been 73 in the past month.  This spread could easily move to well over 100 bps in short order if the Fed doesn’t backpedal over the next few days.

Posted on March 17, 2016 at 5:24 am by alexmanzara · Permalink
In: Eurodollar Options

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