May 6, 2018. As Good As It Gets

I was skimming the news sites Saturday morning and on the Wall Street Journal’s there was a long term chart of the unemployment rate which noted the last time the rate was this low (3.9%) was Dec 2000.  Let’s take a look back.


From 1995 to 2000 the FF rate bounced around between 4.75 and 6%.  In late 1997 the rate was 5.5%.  In Sept 1998 we had the LTCM crisis and by the end of the year the Fed had cut… to 4.75.  At the time, LTCM was a major crisis, threatening to bring down the entire financial edifice.  The Fed famously gathered the major financial players to arrange a bailout. By June 1999, Greenspan began to hike again, ending the year at 5.5%.  This was the dot-com era.  The turn of the century.  In February, 2000, the Fed hiked to 5.75, then to 6% in March, followed by a 50 bp dinger on May 16.  Eighteen years ago.  And that was the peak, 6.5%.


Amusingly, a CNN/Money piece at the time noted, “[The Fed] also gave an onerous hint that it will implement more rate increases in the months to come if need be to ensure the now-record economic expansion continues forward without stumbling.”  Why, that’s just what we’re being promised now.


The article is quite an interesting throwback.  Here’s a snippet, which could have been written today:


What concerns Fed officials is that that mix may be starting to end. The sizzling U.S. job market has spurred employers to start doling out higher wages and benefits to workers to keep them from leaving. And those workers, armed with bigger paychecks and pleased with the gains they’ve made investing in stocks and real estate, have continued to spend in the face of rising rates — something that has begun to give some retailers the green light to begin lifting prices.

Even so, overall inflation still remains remarkably subdued.


Well perhaps it’s not exactly the same as today, but an article on Bloomberg notes some of the same conditions, for example, the Q1 Employment Cost Index showed private-sector wages posted the strongest yoy gains of this expansion.


The unemployment rate had been in decline going into the year 2000, and throughout that year remained between 4.1 and 3.8%.  By January of 2001 it was 4.2% and never looked back, marching higher into 2002.  Stocks were on a tear going into the turn of the century, with Nasdaq surpassing 5000 for the first time in March 2000.  SPX had broken through 1500, but topped out just above that level in August.  In terms of the curve, the red to gold ED pack spread declined as the Fed hiked, inverting below zero in March.  After the May hike, the curve bottomed, and a year later was 100 bps as the Nasdaq bubble rapidly deflated.  Red/gold has also declined during this current hiking cycle, having made a new low in the middle of last month at 8.25 bps.


Both then and now, the sub-4% employment rate begs the question: Is this as good as it gets?


In 1997, Jack Nicholson starred in a movie of the same name. He played Melvin Udall, an obsessive-compulsive romance novelist who rudely insults almost everyone he meets.


There’s a line in the movie that reminds me of our current US government.  Jackie, the starry-eyed receptionist who is a fan of Melvin’s romance books breathlessly asks him, “How do you write women so well?”  Melvin responds, “I think of a man. Then I take away reason and accountability.”


Might as well ask, how does the American government manage its financial affairs?  With trillion dollar deficits looming, there doesn’t seem to be much in the way of reason.  And in the old days, perhaps the bond vigilantes would force accountability.  No longer.  However, we may get a taste of the old medicine as the treasury auctions 3s, 10s and 30s this week.  These three auctions are supposed to raise nearly $34 billion in NEW cash.  Rates barely moved Friday, or, for that matter, on the week.  Net changes across the curve were within 2 bps, with tens -1.3 to 2.944%. Will we see a concession this week?  Besides the auctions, we’ll get inflation data on Wednesday and Thursday (PPI and CPI), and Trump’s expected refusal to extend the Iran deal.  As an interesting side note, this week’s Bank of England meeting is now leaning toward no change in rates, an abrupt reversal from previous guidance.  As Barclay’s notes (from a Reuters article) “Resetting communication after sitting out a rate hike will be an uphill task for the Monetary Policy Committee.”


The takeaway is that central banks, with all of the financial data and analysis at their fingertips, often have a hard time identifying turning points.  It was true in 2000, and in 2007.  Flatness in the back end of the curve is telegraphing the possibility of economic weakness towards the middle or end of next year, and increased treasury supply may accentuate a move toward tighter credit conditions.  Maybe this IS as good as it gets.



Note: the CME begins trading SOFR this week.  The NY Fed site has daily data at

On the CME website see:


4/27/2018 5/4/2018 chg
UST 2Y 248.0 249.7 1.7
UST 5Y 279.9 278.0 -1.9
UST 10Y 295.7 294.4 -1.3
UST 30Y 312.5 311.4 -1.1
GERM 2Y -57.8 -58.0 -0.2
GERM 10Y 57.1 54.4 -2.7
JPN 30Y 73.0 72.7 -0.3
EURO$ Z8/Z9 33.5 32.5 -1.0
EURO$ Z9/Z0 8.5 5.5 -3.0
EUR 121.31 119.63 -1.68
CRUDE (1st cont) 68.10 69.72 1.62
SPX 2669.91 2663.42 -6.49
VIX 15.41 14.77 -0.64


Posted on May 6, 2018 at 1:04 pm by alexmanzara · Permalink
In: Eurodollar Options

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