Nov 8. But are you SURE the Fed hikes?

–The front end of the market continues to press lower, with hike odds for December over 90%. January’18 Fed Funds (FFF8) were offered at 9861.5 during the day, but closed at 9862. There are 2 month-end dates in this contract which typically are associated with a lower Fed effective print; my assumption is that a hike would take FedEff to 141 bps, and given the year-end and month-end, I’d peg the final settle for FFF8 at 9859.6 or 59.7. (Last year-end the Fed Eff was 15 bps below target). The point is that downside is limited to a couple of bps, but if Fed’s hand is stayed then 22.5 of upside. It’s not quite as clear with EDZ7 due to lib/ois, but the basic equation is the same. (EDZ7 9846.5s).

–Extending a bit further, the two-year future settled at 107-20.25, which equals the low settle for this contract. Late in the day it was 20 offer with the 2yr yield at 1.629. I checked TUZ7 107-24 calls which were 1/1.5. DV01 is $40 so the calls cost around 1 bp for 2 weeks (Nov 24 settle), around 6.25 bps otm. Disaster insurance.

–The Nikkei has surged 20% in the past two months. Trump reckons that was purely in anticipation of his trip to Asia as he seems to take credit for capital gains everywhere… but a small crack opened yesterday with the Russell, which fell 1.25%. Small caps appear most sensitive to the tax plan (Russell surged 11% from its low in August), but the postcard-size return that Ryan and Trump wave around looks like it’s getting larger and more complex.

–Big consumer credit number yesterday $20.8B, a 6.6% pace. This sort of data (JOLTS as well) supports the expected Dec hike, but the long end sees growth as transitory. The curve continues to flatten with 2/10 at a new low of 68, 5/10 at a new low of 32 and 5/30 at 78.7. While deferred euro$ calendars aren’t quite making new lows, they are awfully compressed. For example, since 2011, the spread between the 6th and 10th quarterly has posted a low of 11 bps. EDH19/EDH20 corresponds currently to 6th/10th and settled at 15.5. EDM9/EDM0 settled 13.5. Not exactly reflecting economic vibrancy.
–Hey ML …it’s the ten year auction today… maybe that’ll limit the loss in the TY straddle to only 2/64’s…

Posted on November 8, 2017 at 4:27 am by alexmanzara · Permalink
In: Eurodollar Options

Leave a Reply