March 19. FOMC announcement and Press Conference this afternoon
–FOMC meeting and projections/press conference today. 6.5 employment threshold expected to be dropped. December’s projections had 12 of 17 members expecting the first rate hike in 2015. However, the “blue dot” average rate seen by Fed members in 2015 is just slightly over 1%. (Reds settled 0.88 yield as a pack). Blue dot average rate for 2016 is just over 2%, and green pack settled around 1.88%. So in terms of red/green pack spread at 100 bps, the market pretty much is in sync with the Fed or vice versa. However, over the “longer run” the dots are around 4%, yet gold pack is still only 2.52%. So while there may be some price adjustments after the FOMC projections, the market appears more comfortable with the suggestion in Hilsenrath’s piece yesterday, that funding rates will likely “normalize” at a much lower rate than in the past.
–In terms of market action, there wasn’t much yesterday, save premium sales in continuation of safety unwind. Longer maturity euro$ straddles barely moved, but 1.5 bps were taken out of Green and Blue April straddles (settled 20.0 and 22.0).. In addition there was a consistent seller of TYM 122.5/126 strangle from 52 down to 48 (settled 48). New position, open interest up 13k. So while TYM 124.5^ settled 2’10 on Friday, yesterday’s close was 2’00.
–With focus having turned to China and commodity financing gone sour, it’s worth remembering that EU stress tests could also reveal cracks. Reuters has a piece saying banks are concerned negative data could leak out…”The problem is that the health checks will be done in different stages. Right now, more than 1,000 auditors and independent specialist appraisers are trawling through trillions of euros of assets, checking whether banks have set aside enough capital to cover potential losses. [I’m sure nothing bad could leak from 1000 auditors]. A stress test will follow in May and June to check how banks hold up under potentially damaging scenarios.” Final result expected in October.
