Oct 23. If negative rates aren’t working, let’s make them MORE negative

–It’s all about liquidity, or about central banks boosting asset prices and depreciating currencies.  Yesterday’s ECB press conference featured a very dovish outlook “…a rich discussion about all monetary policy tools …will reexamine degree of stimulus in December…discussed depo cut.”  So the Schatz went to a new low yield under -30 bps.  Italy and Spain 2 years went negative.  Hard to believe US still at positive 60 bps…UK is 52.  The treasury announced it was suspending next week’s 2 year auction, probably to prod Congress into action on the debt ceiling.

–Stocks exploded on prospective central bank stimulus. GOOG and AMZN beat at the end of the day. The euro was crushed, dropping over 2 big figures to just above 111.  According to Reuters, “The Bank of Japan will cut its growth and inflation outlook for this fiscal year at a rate review next week but only slightly tweak its projections for next year, sources said, possibly tempering expectations that the central bank will soon ease monetary policy further.”  If EUR continues to fall, further weakening EURJPY, then the BoJ will be compelled to also add stimulus.  It’s the only game in town.  Which will further encourage depreciation by China, thereby gutting the US (exporting) manufacturing sector.
–US yields didn’t change much by the end of the day, with tens down fractionally to 202.3.  The curve was slightly steeper.  Near the close there was a huge buyer of 100k red midcurve December 9887p for 1.5, some covered at 9915 with 10 delta.  In every cycle, in front of the Fed and employment reports, there is heavy accumulation of front red midcurve puts.  Those buys haven’t really panned out.  However, given the weakness of the last jobs data, and the continued low level of jobless claims combined with JOLTS, perhaps this report will rebound the other way.


There’s a movie called Wolf with Jack Nicholson and Michelle Pfieffer, where Jack, as Will Randall, says this:

You know, I think I understand what you’re like now. You’re very beautiful and you think men are only interested in you because you’re beautiful, but you want them to be interested in you because you’re you. The problem is, aside from all that beauty, you’re not very interesting. You’re rude, you’re hostile, you’re sullen, you’re withdrawn. I know you want someone to look past all that at the real person underneath but the only reason anyone would bother to look past all that is because you’re beautiful. Ironic, isn’t it? In an odd way you’re your own problem.

Paraphrasing for the Fed (and other central banks of the world)…

…You’re very powerful and you think the market is interested in you because you have sophisticated models, but you want them to be interested because the various economic agents actually do what the models forecast. The problem is, aside from all the impressive speeches and papers, the models aren’t working. You’re academic, you’re slow to react, your inflation forecasts are woeful, you’re miscommunicating. I know you want the market to look past all that and act like the models suggest, but the only reason anyone would bother to look past all that is because you’re powerful. Ironic, isn’t it? In an odd way you’re your own problem.

Posted on October 23, 2015 at 5:16 am by alexmanzara · Permalink
In: Eurodollar Options

Leave a Reply