March 25. Real time pricing

–A WSJ front page clip says ‘Inflation Pickup, New Home Sales point to firming economy’.  If the market has the same interpretation, then why did all eurodollar calendar spreads again make new lows, and why did the ten year note yield fall another 4.3 bps to 187.3?  I think what more appropriately captures market sentiment (even in the US) is this item from Bloomberg: ‘Prospects for an interest-rate increase in Taiwan are fading fast after consumer prices began declining this year and more than 20 central banks eased monetary policy.’
–It’s not clear that the Fed will absolutely refrain from rate hikes this year.  What the eurodollar curve is unmistakably screaming though, is that any rate hikes will be modest and gradual.  “What did the snail say who was riding on the back of a turtle?   Wheeeeee!!”  That kind of pace…  All euro$ calendar spreads compressed.  The peak one year spread is still Sept’15/Sept’16 but it’s now only 3/4% (75.5s).  Red/gold pack spread declined another 1.75 to just 103.75.  Remember, red/gold was around 300 at the start of 2014.  If market perceptions suddenly shift on prospects for the US economy and tightening, then the dollar could have a very rapid retracement.
–Having said that, I am still inclined to buy deferred eurodollar calendars, for example from the last reds back.  Though the US economy might slow, inflation comparisons are clearly going to accelerate at some point.  There were several spontaneous conversations at the desk yesterday about the retail price of gasoline, which has surged over 20% in the past couple of weeks.  But even more compelling than that is this link:  It is a measure of online retail prices and it shows a big jump.  I haven’t yet researched Google’s real time pricing project, but I suspect it shows the same dynamic.
–Five year note auction today.

Posted on March 25, 2015 at 5:14 am by alexmanzara · Permalink
In: Eurodollar Options

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