Oct 29. Market still can’t fully believe a hike is coming

–In the old days, a statement with a specific mention of tightening “…at its next meeting” would have taken the odds for a hike at that meeting to 60 or 70%.  Yesterday, January Fed Funds settled 9975.5 and EDZ5 at 9959.0.  With the expiring October FF at 9987.5, and Jan just 13 bps lower, the odds for a hike are slightly above 50%.  With 3 mo Libor around 32.5 bps, and EDZ5 at 41 bps, that contract reflects even smaller odds of a hike at around 35%.  Of course, 3mo libor itself has some percentage of expected tightening built in, so EDZ odds are a little higher, but the point is that the market isn’t giving the Fed much respect.  In fact, it’s probably worth looking at selling EDZ to buy FFF.  After taking heat last time about giving too much emphasis to overseas spillover, the Fed softened its reference by simply stating it is “…monitoring global economic and financial developments.” So the dollar strengthened, and gold was hammered from its early high.  Oil however, surged 6% from its low, and stocks leapt to victory, shrugging off the idea that the Fed would willingly try to stop the merry-go-round of share buybacks and merger activity funded by low rates.
–The curve flattened with 2/10 at a new low 138.7 and 5/30 down 8 bps at 141.  Red/gold packs spread posted a new low just under 121, down 1.875 bps on the day.  Five year (old) yield was up 10 to 145.6.  The buyer of 0EZ 9900 puts for 4 prior to the Fed was rewarded with a settlement of 7.25.  Though 45k were sold at 7.0 after the FOMC, open interest sheets indicate that positions were added, not closed (OI prelim +8500).  Jobs data now looms large, with Yellen speaking on the Wednesday (Nov 4) prior to payrolls, which will be an ideal time to solidify the market’s expectation for a hike.
–Q3 advance GDP today expected +1.7, though Atlanta Fed’s GDP Now is tracking at 1.1%.  Jobless Claims expected 265k, though in related news out this morning, DB is slashing its workforce down to the CEO, 4 tellers and a security guard.  Seven year auction this afternoon.

Posted on October 29, 2015 at 5:25 am by alexmanzara · Permalink
In: Eurodollar Options

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