March 9. Friday’s payroll data caused yields to move higher, but the overall theme is still one of restraint

–Friday’s employment data (NFP 295k, rate 5.5%) sparked a large sell off in interest rate futures.  TYM5 closed down exactly 1 point at 126-020, and the current ten year jumped 12.9 bps in yield to 223.4.  Nearly all euro$ calendar spreads made new highs, however there is still no one-year calendar spread that’s over 100 bps.  Peak continues to be EDU5/EDU6 as it has been for quite some time, at 95 bps up 6 on the day.  In terms of rate hikes through the end of the year, note that January 2016 Fed Fund contract closed at 99.335, which was down 8 on the day.  However, with the near FFH’15 contract at 99.885, the January contract is just 55 bps higher in yield, and excluding March and April meetings which Yellen indicated are off the table, there are still five FOMC meetings before the end of the year.  So although Friday’s reaction was fairly large, the market is really not pricing aggressive Fed moves as had occurred in previous tightening cycles.  The decline in implied vol is another sign that fears of much higher rates are restrained; even after adjusting for the weekend time value TYM vol is just 5.8.
–Also released late Friday was the Consumer Credit data, which showed another decline in revolving credit cards, -1.6% in Jan.  Though non-revolving (autos and student loans) is nearly 3/4 of the total amount, in aggregate there has been deceleration for the past three quarters.  Here are the growth rates: 2014 Q1 6.5, Q2 8.2, Q3 6.7, Q4 6.0 and January only 4.2.  Perhaps it will be the same pattern as last year, a slowdown associated with the polar vortex.  But I doubt it.  I would weigh Factory Orders and Consumer Credit more heavily than lagging jobs data.  The US economy is slowing down.  With the drop in gasoline, one might think that auto lending would be through the roof.  The weekly savings in fuel go a long way in terms of low monthly auto payments, especially since maturity terms have been stretched.  But in spite of the Q3 and Q4 fall in fuel prices, households are holding back.
–This week brings treasury auctions of 3’s, 10’s and 30’s.  Retail Sales data on Thursday.

Posted on March 8, 2015 at 4:23 pm by alexmanzara · Permalink
In: Eurodollar Options

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