March 19. The Fed cuts rates

–The Fed followed the Riksbank’s lead and eased yesterday, sending the ten year yield plunging 13 bps and the 2 yr note down 12 [2pm mark in tens was 194.2, down 11.6].  Stocks ripped higher and the euro had a five handle run, trading above 110 having started the week flirting with 105.  One year eurodollar spreads were crushed, with the peak now being EDZ15/EDZ16 at just 79 bps, down 8 on the day.  Red/Green (2nd to 3rd year) pack spread settled at a new low of just 56.5, just slightly above this year’s low of 53.0.
–Of course, the Fed didn’t actually ease, but they slashed economic projections suggesting further weakness, and all those looking for bond armageddon were sent scrambling for the exits.  I have been watching January 2016 Fed Funds to gauge the extent of perceived tightening for the rest of this year, and it jumped 9.5 bps to close exactly at 99.50 or 1/2%.  A news item this morning cited Morgan Stanley is now expecting no hike in 2015.
–Here are the economic projection changes:

Change in Real GDP went from 2.6 to 3.0 in Dec to 2.3 to 2.7 at this meeting

Unemployment rate from 5.2 to 5.3 in Dec to 5.0 to 5.2

Core PCE inflation from 1.5 to 1.8 in Dec to 1.3 to 1.4 (well below 2% target)

Dot projections:

For 2015 from 1.125% in Dec to 0.772% in March vs EDZ5 settle  99.310 or 0.69%

For 2016 from 2.537% in Dec to 2.022% in March vs EDZ6 settle 98.520 or 1.48%

For 2017 from 3.779% in Dec to 3.184 in March vs EDZ7 settle 98.000 or 2.00%

–Even though the Fed tried to narrow the gap between what the market has been pricing and their dot projections, rates set by Mr Valentine are still substantially lower than the Dots.  Though the dot plot for the end of 2016 dropped by over 50 bps to 2.02%, EDZ6 settled 98.52, consistent with a FF target of just 1.25%.
–US economic news today includes Jobless Claims expected 293k, Philly Fed at 7.0 and Leading Indicators at +0.3.

Posted on March 19, 2015 at 5:16 am by alexmanzara · Permalink
In: Eurodollar Options

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