Oct 26. ECB today
–ECB today expected to shave purchases from €60 billion month to €30. Here’s a link from el-Erian describing challenges:
https://www.bloomberg.com/view/articles/2017-10-26/what-to-expect-from-the-ecb-meeting
–Ten year yield rose 3.3 bps to 243.9. Durables were strong yesterday with Core Capital Goods +0.7 vs expected +0.1. Red/gold euro$ pack spread closed at a new recent high of 50.75 bps, +1.875 on the day, but up 13 bps from the low last Tuesday. As yields have moved higher, implied vol has as well, with all contracts posting marginal new highs in implied for the month (TYZ 4.3%). Open interest building as rates increase as well, for example TY open interest +63k yesterday. Sentiment in the market has more clearly shifted to concern about the downside.
–Near euro$ calendars posted new highs, with EDZ7/EDZ8 +2.5 to 44.5. EDZ8/EDZ9 +0.5 to new high of 24.0. Also note that Dec’7/June’8 is 26.5, up 2.0 bps; it appears that the market is comfortable with a hike in December (now priced at 85% by Jan Fed Funds) and certainty of another in the first half. The spread of Feb/April FF settled at 10.5 indicating less than 50/50 odds of a hike at the March meeting.
–Trump appears to have dismissed Yellen as Fed chair candidate: “In one way, I’d have to say, you’d like to make your own mark, which is maybe one of the things she’s got a little bit against her.” On the other hand, Trump’s agenda is completely dependent on low financing rates. Speaking of which, Illinois was able to sell $4.5b 10y bonds yesterday at 3.74%, even though the state’s Comptroller isn’t really even sure of the size of the backlog of unpaid bills (approx $16 billion according to a BBG article). So it seems as if capital is still recklessly willing to chase yield.
