May 27. Yellen today. G R A D U A L

–Yields fell fairly dramatically on the short end yesterday, with the two year note falling nearly 5 bps to 86.7.  Green pack was the star performer, +5.875.  While the headline durable goods number was a healthy +3.4%, on a month over month basis Core Capital Goods was -0.8% and yoy -5.0%.  Ex-transportation was -1.8% yoy.  Auctions concluded with the 7 year, with solid demand seen throughout the week.
–Yellen speaks today.  Her speech in late March was dovish, and while some data has shown improvement in the last 8 weeks, I would suspect that her cautious, risk-averse style would have her sidelined in terms of a June hike.  However, her other trait is inclusiveness, and I believe other members of the Fed have overwhelmed her policy instincts.  How to reach a middle ground?  Emphasize that rate hikes will be gradual.  Continued weakness in CAPEX is worrisome, and international headwinds still linger, as noted by Japan, where Abe is delaying implementation of the sales tax and warning of parallels between now and the 2007/8 crisis.
–US equities remain well bid, but I would note that yesterday was one of the lighter volume days of the year.  Typically, strong volume will support the trend, so a lack of activity near the highs is of some concern, though there will likely be a surge in new commitments if SPX breaks into new high territory (though Nasdaq and Russell are lagging significantly).
–Normal electronic close today in spite of the holiday.  By the way, today’s TY 129.75 calls were slightly in the money by yesterday’s close, having been offered at 3/64 in the morning, they were trading 9 late in the day ref 129-24.5.  Enjoy the long weekend!

Posted on May 27, 2016 at 5:25 am by alexmanzara · Permalink
In: Eurodollar Options

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