May 31. Stocks near new highs, but no signs of inflation…

–Both Bullard and Brainard voiced worries about inflation not reaching target.  Here’s a snippet from Brainard’s speech:  “…I see some tension between signs that the economy is in the neighborhood of full employment and indications that the tentative progress we had seen on inflation may be slowing. ….it may lead me to reassess the expected path of the federal funds rate in the future.”  Well, I have news for you Lael, the euro$ curve has already adjusted the path lower.  This morning, the FT has this article: The Fed’s Conundrum: Stubbornly  Low Inflation.  And the WSJ includes this piece: Doubts Cloud the Fed’s Rate Increase Plans Beyond June. [Beige Book summary of conditions released this afternoon].  The curve continues to flatten and that’s contributing to weakness in financial stocks.  For example, in a relatively flat broader market, GS fell 2% and JPM was down 1.7%.

–Early yesterday morning there was a buyer of about 40k EDH8/EDH9 one-year ED spreads for 33.5.  Volume by 8 AM Chicago time was a bit over 55k.  By the end of the day this spread had eroded to just 31/31.5, with volume just over 63k, as the curve generally flattened to new lows (H8/H9 settled 31.0, a new low).  For example, 2/10 treasury spread closed at 93 and edged slightly lower after open outcry.  The red/gold pack spread also closed at a new low of 62.375, almost exactly where it was on election day, though it had reached 100 in December.

–There was a large buyer of midcurve July 0EN 9850/9862c spds for 1.5.  Appears to be a roll-up of a short as open interest fell 136k in 9850c and rose 148k in 9862c.  The underlying contract, EDU8, closed at 9836.0. The pre-employment trade has typically been to buy near midcurve puts and put spreads and sell calls.  It hasn’t really worked out and the open ended call risk is getting a little more uncomfortable.

–Oil and copper both lower this morning, adding to the disinflation story.

Posted on May 31, 2017 at 5:16 am by alexmanzara · Permalink
In: Eurodollar Options

Leave a Reply