Oct 16. Industrial commodities firm
–Weaker than expected CPI Friday sparked a rally in fixed income with Core +0.1 (yoy +1.7%). Curve flattened to new lows for the year, with 2/10 at 78.5 bps, -2.3 on the day, and red/gold pack spread at 40.375, -2.0 bps, as golds were +5.0 on the day. EUR a bit weaker this morning as Austria elected a new anti-immigration leader and the Catalan situation simmers. Copper has exploded to a new high this morning, perhaps in part due to PBOC’s Zhou calling for 7% growth in the second half in front of this week’s National Congress meeting. Crude oil is also rallying, up 0.67 this morning and over $52/bbl, poised to test last month’s high at 52.86.
–Yellen this weekend called inflation a surprise but expects a gradual rise.
–Front end of the curve remains steep with EDZ7/EDH8 closing at the high of 13 bps while one year away, that is, EDZ8/EDH9 is only 4.5 bps. EDZ7/EDM8/EDZ8 butterfly settled at a new high of 8 bps, with Z7/M8 23 bps and M8/Z8 at 15.0. That fly has had an amazing run-up from -4. While January FF still indicate around 75% odds of a hike in December, Feb/April FF spread (which isolates the March 21 FOMC meeting), closed at 9.0 bps, more or less pointing to odds of 1 in 3 for a hike at that meeting. There will be a new Fed chair by then; note that the March FOMC date is the week after expiration for EDH8.
