May 25. I just can’t figure it out…

–One of my favorite Far Side cartoons is attached.  The perplexed donut shop proprietor.  “I’m moving over 500 donuts a day and I’m just barely squeakin’ by.” …as the bloated employee looking on innocently sweeps up.

–The owner is the Fed.  The helper is the market.  You keep making the donuts, I’ll keep eating them.  So what did the Fed minutes say yesterday?  “Maybe we should use a few less sprinkles on the iced donuts.”  That’s not putting anyone on a diet.  It’s telling the asset markets that the Fed is not going to stand in the way.  Sure we’re going to hike in June, (which everybody knows already), but we’re going to trim the balance sheet in imperceptible steps.  The Fed claims to have concerns about CRE and asset markets, but then can’t seem to understand why excesses develop as they watch, scratching their heads like innocent bystanders.

–Summary of minutes.  Indications of slower growth in Q1 were generally deemed transitory (the Fed’s favorite word…along with gradual).  So here’s what they said about balance sheet reduction:

“Under the proposed approach, the Committee would announce a set of gradually increasing caps, or limits, on the dollar amounts of Treasury and agency securities that would be allowed to run off each month, and only the amounts of securities repayments that exceeded the caps would be reinvested each month. As the caps increased, reinvestments would decline, and the monthly reductions in the Federal Reserve’s securities holdings would become larger. The caps would initially be set at low levels and then be raised every three months, over a set period of time, to their fully phased-in levels. The final values of the caps would then be maintained until the size of the balance sheet was normalized.[in June of 2073]

Nearly all policymakers expressed a favorable view of this general approach”.

–OK.  This really doesn’t sound like something that is a ‘substitute’ for changes in FF target.  So, bonds and stocks rallied.  Way to lean against easier financial conditions.  The STAFF ACKNOWLEDGED the lax environment:  “Prices of risky assets increased… Treasury yields declined, dollar depreciated. …decline in yields driven in part by expectations of a somewhat slower pace of rate increase following FOMC communications…and waning of investor optimism about prospects for more expansionary fiscal policies.”–It appears that even the guys on staff are saying WTF.

–Anyway, the ten year yield declined 2 bps to 226.4 at futures settle, and was down to 225.2 ref 126-05+ late in the session.  Nasdaq’s at a new high, blah,blah, blah.  Option premium remains offered.  Slight new low in 2/10.  Seven year auction today.

Posted on May 25, 2017 at 4:58 am by alexmanzara · Permalink
In: Eurodollar Options

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