May 11. NEWSFLASH: Stocks may not reflect the economy

–In spite of a surge in stocks, US interest rate futures traded tight ranges on small volume.  However, back month euro$ calendar spreads edged to new lows.  For example, red/green (2nd to 3rd year) pack spread settled at just 22 bps, down 0.5 on the day.  Red/gold settled just above 71, -0.875.  The magnitude of the moves is not large, but the implications of an ever flatter curve given robust equity and energy prices is surprising.  I would go so far as to say something looks wrong.  I suppose my instinct is corroborated by the Fed: (from BBG)  “Benchmark gauges such as the S&P 500 Index are such flawed mirrors of the economy that they probably fail as predictors of gross domestic product, according to a new paper by Julieta Yung, an economist in the research department at the Fed Bank of Dallas. Half the components are manufacturers, for one thing, much more than is reflected in GDP.”  I suppose one would almost be forced to extend the reasoning to its logical conclusion: IF the S&P 500 does not appropriately reflect the economy, and the primary goal of all the Fed’s QE programs and other stimulus is to spur stocks and other asset prices higher, then QE has little effect on the economy.
–In contrast to the lethargic interest rate market, soybeans are on a holy tear.  Since the beginning of March, July beans have rocketed over 25% to 10.89.  Precious metals are also bid this morning.  So the reflationistas can still point to some evidence of potential strength.  But for now, bonds aren’t buying it.

Posted on May 11, 2016 at 5:24 am by alexmanzara · Permalink
In: Eurodollar Options

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