Nov 9. Revisit the ‘conundrum”?

–Friday’s strong payroll data (+271k) solidified the prospects for December liftoff.  Euro$ calendar spreads made new highs, however, there is not a single 3 month calendar above 25 bps; the peak is Sept16 to Dec16 which settled 18.5. (Large buying in EDH16/EDM16 at 17.5 Friday). The peak one year is Dec15/Dec16 at 71.5 bps, which barely indicates three hikes for a full year.
–A couple of sources highlight comments from the largest shipping company Moeller Maersk, “We conduct a string of our own macro-economic forecasts and we see less growth — particularly in developing nations, but perhaps also in Europe — than other people expect in 2015,” Andersen said. Also for 2016, “we’re a little bit more pessimistic than most forecasters.”  As recently as October, the CEO of Fastenal’s CEO had this to say, “The industrial environment is in a recession – I don’t care what anybody says, because nobody knows that market better than we do. You know, we touch 250,000 active customers a month.”
–The US economy seems to be doing fine, though it’s faced with the increasing headwind of a stronger dollar.  However, world trade is soft, as indicated by the Baltic Dry Index scraping along near new lows.  The global situation appears to have to potential to stall the US, a risk that the Fed dismissed in the October statement.   Today, Boston Fed’s Rosengren speaks about the outlook at noon EST.
–Ten year yield closed up 8.4 bps Friday to 233.  5/30 spread made a new recent low marked just over 135.  The last hiking cycle began in 2004.  it’s interesting to note that by February of 2015, Greenspan noted the “conundrum” of long rates remaining stable or even declining in the face of Fed hikes.  Here’s a snippet of Greenspan’s testimony: “In the current episode, however, the more-distant forward rates declined at the same time that short-term rates were rising. Indeed, the tenth-year tranche, which yielded 6-1/2 percent last June, is now at about 5-1/4 percent. During the same period, comparable real forward rates derived from quotes on Treasury inflation-indexed debt fell significantly as well, suggesting that only a portion of the decline in nominal forward rates in distant tranches is attributable to a drop in long-term inflation expectations.” … “For the moment, the broadly unanticipated behavior of world bond markets remains a conundrum.”
Is the same dynamic possible this time around?
Full link to speech: http://www.federalreserve.gov/boarddocs/hh/2005/february/testimony.htm

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Posted on November 9, 2015 at 5:18 am by alexmanzara · Permalink
In: Eurodollar Options

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