May 25. Summer hike

–Short end of the market remains under pressure.  The Fed’s discount rate meeting revealed that four banks wanted to hike the discount rate, underlining the new hawkish sentiment.  Near euro$ calendars made new highs, for example, Sept16/Dec16 settled at 11 (+0.5), and Sept16/Sept17 at 34 (up 2 on the day).  The market is now pretty much pricing for a summer hike; the spread between May Fed Funds (front expiring contract) and October FF which covers the next 3 FOMC meetings, is 22 bps.  If the Fed were to go in June, then it would leave the door open for another hike in Sept, in which case the front end has more downside.  However, EDU16 is at 9914, close to pricing in certainty of just one hike, and the option market appears comfortable with that, having hammered the straddle to just 13 bps.  There’s a story on BBG today saying that China is going to ask the US for more specifics on tightening timing in order to adjust their own policies (I’m sure that info would never leak out…), but I would note that the yuan is weaker again this morning at 6.5627 and is nearing its recent low from late December.  Weaker yuan pressures other Asian exporters and adds to disinflationary pressures, which is what the US curve is reflecting.  5/30 edged to a new low beneath 125 bps.  2/10 is holding just above 95.  The curve isn’t projecting inflationary pressure, but the continued rally in oil is certainly alleviating pressure on some sectors of the economy.
–News today includes the 5 year auction and Markit Services PMI, expected 53 from 52.8.  Internat’l Trade expected -$60.2b.

Posted on May 25, 2016 at 5:32 am by alexmanzara · Permalink
In: Eurodollar Options

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