May 26. Rumor of ECB rate cut

There was a rumor yesterday that the ECB was considering an emergency 50 bp cut which seemed to coincide with a general market turnaround.  However, it seems more likely to me that it was related to talk about cutting the ECB’s punative 100 bp add-on to Fed’s swap line to a less punative 50 bp level.  In any event, markets still signal rough economic times ahead as 1) 2/10 treasury spread continues to plunge and is now near 240, 2) ten year note to TIP spread made a new low at 188, 3) back month eurodollar spreads continue to flatten.  There is nothing in market action that gives particular confidence in spite of the rise yesterday in Consumer Confidence.  The US is edging ever closer to the Japanese experience of pernicious asset deflation that overwhelms all else.

–Yesterday may have been capitulation low in near euro$ contracts as EDZ0 traded as low as 9878, or 1.22%, ironically the same dollar rate the ECB made available to banks.  In any case, selling pressure abated.   

–Interesting note in the press (USA Today) says that private pay as % of GDP is shrinking to new lows.  When one considers that financial firms had a remarkable comeback (and indeed accounted for the bulk of corporate profits) it seems that everyone outside of financials and government must really be pinched.

–5 yr note auction today, along with Durables and New Homes Sales

From USA Today…pay from private companies shrinking:

Paychecks from private business shrank to their smallest share of personal income in U.S. history during the first quarter of this year, a USA TODAY analysis of government data finds.

At the same time, government-provided benefits — from Social Security, unemployment insurance, food stamps and other programs — rose to a record high during the first three months of 2010.

Those records reflect a long-term trend accelerated by the recession and the federal stimulus program to counteract the downturn. The result is a major shift in the source of personal income from private wages to government programs.

Posted on May 30, 2010 at 3:41 pm by alexmanzara · Permalink
In: Eurodollar Options

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