I’ll give you a tenth of a bitcoin per acre of corn – IF you can deliver
June 17, 2019
–Middle of June and it’s just 56 degrees in Chicago as cool damp weather persists. Reuters ran an article this morning about farmers in Illinois lamenting the lost corn crop, noting that one farmer planted only 900 of 8500 acres. Dec Corn is up 8 1/2 cents this morning to a new high of 472. Apparently there has also been trouble in getting the bitcoin crop seeded, because that has also surged to a new high this weekend, trading up 770 at 9210 on the CME.
–The question is whether the bitcoin rally, now said to be sparked by “institutional” buyers, is an initial sign of crumbling confidence in central banks. Or in the financial sector in general. It’s reported this morning that Deutsche is setting up a “bad bank”. Wait a minute, don’t you already HAVE one? The idea of course, is to isolate toxic assets. I suppose if bitcoin was a true signal, gold would also be surging, but it’s down $7/oz this morning in follow-through from a reversal from new highs on Friday. Rate futures have also pulled back in front of Wednesday’s Fed decision. With the June contract off the board today, EDU9 is now the lead contract and EDU9/EDU0 is the most negative one-year spread, having settled Friday at -45.5, indicative of two eases over that year. Of course, the market continues to give high odds of cuts PRIOR to September, with July/August Fed Fund spread settling -19.5 on Friday. It’s just not going to happen on Wednesday.
–Maybe the bitcoin surge is based on the realization that new supply requires electricity for mining, and the massive outage in the southern hemisphere is a shot across the bow. “No you idiot, I said to destroy the power grid in America and the USA, not Argentina and Uruguay!”
–Today’s news includes NY Empire State Mfg, with a consensus of 11 vs 17.8 last. –As a political aside, Trump apparently fired his pollsters due to bad numbers. I heard a fascinating interview this weekend on The Market Huddle (MacroTourist Webcast) featuring Stephen Aniston, who posits that Trump will lose the next election, in part based on migration from California to Texas, which will shift Texas to a blue state. They’re not leaving CA because the weather is bad. It’s because the policies and taxes are so onerous that they’re FORCED to leave, and try the same policies somewhere else! (A lot of other good stuff in the webcast as well). https://www.youtube.com/watch?v=NdByG6BzNQs
–Another interesting article on ZeroHedge, having something to do with Formula One racing and grid girls. There are a lot of pictures and something to do with racing and sponsorship.
Hey Jerome, look at my new dress. It was a steal!
June 16, 2019- Weekly Comment
It’s pretty clear what is driving expectations for a Fed rate cut: Women’s apparel prices. On a year over year basis they fell 5.7% in May. The St Louis Fed chart below starts in 1992. The decline is greater than seen even in the depths of the Great Financial Crisis. The next chart is the University of Michigan Survey of 5-10 year Inflation Expectations, which also hit a new historic low of 2.2%. Obviously, I’m stretching the case like a pair of yoga pants with the women’s apparel thing. (By the way, lululemon LULU made an all time high this week). On the other hand, Powell has gone out of his way to emphasize the importance of inflation expectations in setting policy, and both survey and market measures have declined.
On the week, prices didn’t change all that much. The ten year note was up less than one bp at 2.09% and thirties added 2 bps to end at 2.59%. Auctions were well received with respectable bid-to-cover ratios in spite of the low yields. Stocks ended a touch higher, VIX edged lower. The critical event this week of course, is the FOMC meeting. Though some analysts have called for an insurance rate cut on Wednesday, the market clearly signaled on Friday that it’s NOT going to happen. For example, gold, which was up $15 early on Friday closed nearly unchanged. The dollar index surged, having successfully held the 200 DMA. Fed fund and ED futures downticked. However, odds for an ease at the July FOMC are still quite high. August FF (FFQ9) settled 97.87, 23 bps above FFM9 at 97.64. The July/Aug FF spread settled -19.5, indicating around 80% odds of an ease at that meeting. It’s worth remembering that the Fed taper program ends at the end of September, and it was the increase in asset sales to $50 billion a month in October that coincided with the market turmoil of Q4.
After solid retail sales and industrial production data, the Atlanta Fed marked up its Q2 GDP Now forecast to 2.1% from 1.4%. The NY Fed also increased its Q2 estimate, which now sits at 1.4%. The Fed has already judged recent soft inflation readings as transitory. On the other hand, the constant repetition by various officials that the neutral rate is declining and that another visit to the ELB (Effective Lower Bound) in rates is likely in a downturn, is a clear message the Fed is now in an easing stance. When you have to change the acronym from ZIRP to ELB, thereby removing the reference to ZERO as a boundary, it’s not exactly a reflection of confidence in the broader economic narrative, regardless of the new and improved Fed communication initiative.
The economic signals are conflicting. From msn, “Morgan Stanley’s Business Conditions Index, which captures turning points in the economy, fell by 32 points in June to a level of 13 from a level of 45 in May. This drop is the largest one-month decline on record and the lowest since December 2008 during the financial crisis, according to the firm.”
The Credit Bubble Bulletin cites the rise in Household Net Worth (the equity rebound) as the catalyst for retail sales and notes these stats from the last quarterly report of the Fed’s Z.1:
Household Assets surged $4.697 TN during Q1 to a record $124.694 TN. And with Liabilities expanding just $5.9 billion, Household Net Worth surged $4.691 TN – the strongest ever quarterly increase in Net Worth (2nd place Q4 ‘99’s $3.114 TN). Household Net Worth jumped to 516% of GDP, just below the record 522% from Q3 2018. This compares to peak ratios of 484% in Q1 2007 and 444% during Q1 2000. CBB
It’s not the Fed’s place to handicap the
outcome of the possible G20 meeting between Trump and Xi. While stock investors (and treasury shorts)
want to believe that resolution could occur as quickly as it did with the
withdrawal of the Mexico threat, that’s not a likely outcome. The outgoing Chairman of Economic Advisors,
Kevin Hassett, was interviewed Friday and said that a deal had been so close
with China before it fell apart at the last minute, that it’s not at all
unreasonable to think that a few modifications could quickly lead to a sealed
agreement now. It’s a compelling
argument. Except for the fact that in
the meantime, Trump has issued ultimatums, portrayed China as having a weak hand,
and pursued a sale of $2 billion in arms sales to Taiwan. Additionally, a Dept of Defense document
referred to Taiwan as a “country” in an oblique challenge to the One-China
policy. As noted in the Taiwan Times,
the DoD Indo-Pacific Strategy Report of
June 1 included this passage:
As democracies in the Indo-Pacific,
Singapore, Taiwas, New Zealand and Mongolia are reliable, capable and natural
partners of the US. All four countries
contribute to US missions around the world and are actively taking steps to
uphold a free and open international order.
What’s more likely is that CNY tests 7 between the FOMC and the G20, which would psychologically signal a further deflationary impulse. (You want to see currency ‘manipulation’?) Nothing quick will happen in China negotiations unless the US folds. In the meantime, the situation with Iran is heating up, Italy and the EU are on different pages, and protests in Hong Kong are continuing, all of which present headwinds for risk assets.
OTHER MARKET/TRADE THOUGHTS
The fed effective has been setting at 2.37%. June Fed Funds settled 97.64 or 2.36% on Friday. If there is no move and the EFFR remains at 2.37% for the rest of the month, FFM9 will settled 97.627. If there’s an ease on the 19th and the EFFR goes to 2.12 for the balance of the month, then the settle will be 97.718.
| 6/7/2019 | 6/14/2019 | chg | |
| UST 2Y | 184.7 | 184.9 | 0.2 |
| UST 5Y | 185.0 | 184.4 | -0.6 |
| UST 10Y | 208.4 | 209.1 | 0.7 |
| UST 30Y | 257.2 | 259.1 | 1.9 |
| GERM 2Y | -67.0 | -69.3 | -2.3 |
| GERM 10Y | -25.7 | -25.5 | 0.2 |
| JPN 30Y | 37.9 | 36.0 | -1.9 |
| EURO$ Z9/Z0 | -27.0 | -33.5 | -6.5 |
| EURO$ Z0/Z1 | 7.5 | 7.0 | -0.5 |
| EUR | 113.35 | 112.11 | -1.24 |
| CRUDE (1st cont) | 53.99 | 52.51 | -1.48 |
| SPX | 2873.34 | 2886.98 | 13.64 |
| VIX | 16.30 | 15.28 | -1.02 |
Footnotes and interesting links:
http://creditbubblebulletin.blogspot.com/
https://www.federalreserve.gov/newsevents/pressreleases/monetary20190320c.htm
https://www.taiwannews.com.tw/en/news/3719797
Rate vol surges
June 14, 2019
–Amazing bid to vol Thursday. The chart below shows how treasury vol has exploded as compared to VIX. While one can point to tanker attacks in the Gulf of Oman and Sec’y of State Pompeo naming Iran as the culprit later in the day, stocks took that information in stride. However, interest rate futures surged again yesterday. The ten year yield fell 3.7 bps to 2.089%, but EDZ19 thru EDU20 were up 8 bps. Going into next week’s FOMC, easing expectations are being front-loaded, which of course, steepens the curve. New high yesterday in 5/30 to 77.3 bps. Ten year note to inflation-indexed breakeven dipped to a new low under 170 bps.
–Several shops are (mistakenly) calling for a rate cut next week. Both July/Aug FF and Aug/Oct FF spreads settled at new lows of -20.5. FFV9 on its own posted a new high settle of 9809.5, a level that’s 46.5 bps below the current Fed Effective. I.e. two cuts are priced by September. I can easily see a Fed pass next week and 50 to follow in July.
–A couple of examples of the vol move: On Wednesday, EDU0 9837^ settled 66.5 vs 9831.5, and yesterday settled 70.0 vs 9839.5. USU 154 straddle settled 3’54 Wednesday (153-19) and 4’10 yesterday (154-08). Perhaps these moves are partially due to the possibility of a surprise cut next week, which would also support stocks and therefore suppress VIX. What happens if there’s no cut and a slightly hawkish presser? July VIX futures closed at 17, a pretty good hedge as geopolitical factors are starting to boil over. By the way, gold is also at a new high this morning, having rallied $80/oz since late May.
–Retail Sales today, expected +0.6. Industrial Production expected +0.2%.
They ALWAYS buy when the Blues win the Stanley Cup
June 13, 2019
–Crude oil bouncing this morning after plunging over $2/bbl yesterday to settle 5114 near a new low. I guess that’s good. Except that the catalyst was an alleged attack on tankers in the Gulf of Oman. In any case, stocks have also seen buying and rate futures are higher this morning.
–CPI yesterday was slightly lower than expected with yoy Core +2.0. The ten year auction was well received even though the yield at 2.13 was 35 bps below last month’s 2.479%. 30 year bond auction today. USU9 was unch’d at the close yesterday at 153-19 even though shorter dates rallied. At last month’s auction the yield was 2.892, now it’s 2.62. News that the US gov’t spent more than $3T over the first 8 months of the fiscal year and ran a deficit of $739B doesn’t seem to affect demand for claims on the US taxpayer, because, of course, we’re taking in tariff money. Right?
–The curve steepened with the euro$ strip rising 2 to 5 bps in price. Interestingly, odds for an ease in July are now higher than those for the Sept FOMC. July/Aug FF spread closed -19.5 while Aug/Oct closed -17.0. We’re in a world of ultimatums. Trump has said tariffs will go up on China if Xi doesn’t meet, and the market is telling the Fed it MUST ease in July. Large trades yesterday include buying of October 9825/9850 call spread and call 2×3 for 6.0. Settles were 8.25 and 3.5 (so 6.0 in 2×3). A while ago there had been large buying in Oct 9800/9825 call spread for 2.5 to 3.0. I thought the buying of the 9825 strike was a roll up, but open interest in both calls gained, 38k and 52k. EDZ9 settled +3.5 at 9799.0.
–I can’t recall where I saw this yesterday, but the ratio of small cap Russell to large cap SPX is near the low of 2016 and not all that far from the lows set in the crisis. I have re-created the chart below. That’s probably NOT a sign of solid organic growth in the US economy.
Markets keep pushing the ease
June 12, 2019
–Markets are starting the day on their back foot with oil -160 at 51.67 (CLN9) and stocks lower. Rate futures are higher going into today’s CPI data and ten year auction. While the ten year yield was essentially unchanged yesterday at 2.138%, the eurodollar strip flattened, with EDU9 and EDZ9 the weakest at -3.0 bps, while reds were +0.75, greens +3.125 and blues +4.0. EDU9 will become the front contract next week and settled 9784.5 vs EDM9 at 9755.5 (spread of -29.0). Obviously there’s a cut priced. The Fed Fund settles reveal an interesting change in terms of ease timing: the July/August spread settled -18.0, while August/Oct settled -17.5. In other words, odds of an ease at the July 31 meeting are now higher (by a smidgen) than the Sept 18 FOMC. It’s been a long time since the Fed moved at an off-quarterly meeting.
–The big trade of yesterday was a new buy of 100k 0EQ 9862/9887c spd versus 9826 in EDU0 for 3 bps. The high in EDU0 so far is 9850. EDU9/EDU0 settled -42 yesterday, but had been as low as -55.5 at the start of the month (M9/M0 low has been -79.75) . Could the market price 100 bps of rate cuts from September forward? This call spread indicates that possibility…
–The US says it is planning for a meeting between Trump and Xi later this month but it’s unclear if that’s actually happening. Protests in Hong Kong are getting a lot of press; it seems as if the issues are becoming larger than just trade. In Europe, Villeroy says the ECB could expand stimulus as ERZ9/ERZ0 slips into inverted territory, trading -0.5/0.0 this morning.
–Notwithstanding a grain report yesterday that saw Corn jump 15 cents, longer term charts of the CRB and BBG commodity indexes are ugly. (Pictured below). *All Central Banks, All the Time* doesn’t seem to be doing much for the prices of real things…
Bizarro Markets
June 9, 2019 – Weekly Comment
Last week I started with this line, “This week, the markets eased.” In the week just ended, the trend continued, but the ease was pulled forward in time. The most glaring example can be seen in the July’19/August’19 Fed Fund spread which closed at -20 on Friday from -10 on the previous Friday. The settle indicates 80% odds of a 25 bp cut at the July 31 FOMC meeting, up from 40%. August FF alone settled 97.88 or 2.12%, versus Fed Effective of 2.37 to 2.40%. In other words, by August the market is pricing CERTAINTY of at least a 25 bp cut. By my calculations, an ease at next week’s FOMC is being priced at about 1 in 3 (FFM9 settled 97.6425).
The week before last JP Morgan revised their call from balanced odds between a hike and ease to a forecast of cuts in September and December. Last week Barclay’s vaulted ahead, calling for a 50 bp ease in July, followed by another quarter in September. Citi is looking for a cut of 50 in September. Kashkari is now thinking a HIKE is in order (just kidding). The change in sentiment over the past couple of weeks is simply astounding. This week, inflation data in the form of PPI and CPI are released on Tuesday and Wednesday. Below is a chart of yoy Core data. Do the modest drops in inflation, consistently referred to as “transitory” by Fed officials, warrant full-on monetary easing with conventional and unconventional tools?
Let me just note a couple of other prices. EDM9/EDU9 settled at a new low of -33.25 with June expiration just one week away. The German bund yield closed at -25.7, a new historic low. EDZ9/EDZ0 actually rallied 13.5 bps on the week to -27.0, as the market moved up the timing for aggressive easing by the Fed. In short sterling, Dec’19/Dec’20 settled at a new low of NEGATIVE 8, while Dec’19/Dec’20 euribor settled 0 (with ERU9/ERU0 -4.5). The dollar index fell to a two month low, closing on the 200 day moving average at 96.56. The US two year note fell nearly 10 bps on the week, but 30’s shaved only 1 bp. Stocks soared, with SPX just 2.7% from all time highs. Except in China, where the Shanghai Comp eked out its lowest close since late February, even though the PBOC said there’s “tremendous room” to adjust monetary policy. Gold has rallied eight sessions in a row. The world demands lower rates.
This is bizarro price action.
From Wikipedia:
The Bizarro World (also known as Htrae, which is “Earth” spelled backwards) is a
fictional planet appearing in American comic books published by DC Comics. Introduced in the early 1960s,
htraE is a cube-shaped planet, home to Bizarro and companions, all of whom were initially Bizarro
versions of Superman, Lois Lane and their children…
In the Bizarro world of “Htrae”, society is ruled by the Bizarro Code which states “Us do opposite of all Earthly things! Us hate beauty! Us love ugliness! Is big crime to make anything perfect on Bizarro World!” In one episode, for example, a salesman is doing a brisk trade selling Bizarro bonds: “Guaranteed to lose money for you”.
Of course, Bizarro World was more recently made famous by a Seinfeld episode citing Bizarro Superman, the exact opposite of Superman, who lives in the backwards bizarro world. “Up is down, down is up. He says hello when he leaves and good-bye when he arrives”. This episode also featured “Man hands”. Back in the day, there was a striking clerk working for (of course) FO, who was known as man-hands. But that’s a different bizarre story for a different time.
In today’s environment, “Us buy stocks when yields are forecasting an economic catastrophe.” “Us cut rates when data strong.” “Us buy bonds that are guaranteed to lose value”. The ten year bund at -25 bps? By the way, the US Treasury is raising $54 billion of new cash this week by selling $38Bb in 3 year notes, $24b in tens and $16b in thirties. With the ten year yield having fallen over 70 bps from this year’s high, of which 30 bps was in the past three weeks, what kind of demand will there be for fresh supply? Especially when considering that a slowing economy will make deficits even WORSE, leading to greater supply. “Smithers, how in the world could you bid for 30’s at these yields?!? You’ve blown up our portfolio.” Smithers’ reply “Well, I was able to get a 20 bp yield pick-up over Italian tens.”
The question becomes, why is the market pushing so aggressively for an ease in policy, even with relatively buoyant asset prices and economic data which feature the lowest unemployment rate in fifty years? Is it because of the slowdown in global trade, as Powell alluded to on Monday? Or is it something much more pernicious indicating risks in global financial stability? If it’s the latter it’s not showing up in corporate spreads. HYG and JNK hi-yield ETFs are right back where they were last fall prior to the 4th quarter sell-off.
The question becomes whether the central bank should accommodate what has been a political decision on trade made by the President. According to the dual mandates of full employment and steady inflation, the Fed has done a pretty good job, as Fed officials constantly remind us. On Wednesday, El-Erian published an article with the following question: “Would such [rate] cuts even lead to sustainably and substantially higher consumption and investment; and, if not, how long can markets maintain increasingly elevated asset prices that are decoupled from the underlying economic and corporate fundamentals?” (emphasis added). If the markets successfully push the Fed into aggressive accommodation, Powell will be seen as completely folding to Trump. I simply can’t see how that would be anything but a huge curve steepener.
European bank shares are generally at or below the lows seen at the end of last year. China’s financial system is coming under further scrutiny with the recent state takeover of Baoshang Bank and weakness in yuan, which increasingly looks like a test of 7 is nearing. The old CME floor local lament, whenever big trades came in that turned the flow of the market is: “What do these guys know? They know SOMETHING.” Maybe it’s not the domestic situation, perhaps markets are sensing that it’s the global financial architecture that is nearing a breaking point, exacerbated in part by a strong dollar. In that case, this week’s decline in DXY is welcomed.
Just as a historical sidenote, in August of
1987 SPX was at a new all time high. It
pulled back into September, but made a new run at the highs in early October,
getting within 2% of the top. On
Saturday, October 17, Treasury Sec’y James Baker III told the Germans to “either
inflate your mark, or we’ll devalue the dollar.” On October 19, SPX lost 20.5%.
Sometimes trade tensions lead to a breaking point. In that light, the month end
G20 meeting takes on added importance.
Hello.
| 5/31/2019 | 6/7/2019 | chg | |
| UST 2Y | 194.4 | 184.7 | -9.7 |
| UST 5Y | 192.9 | 185.0 | -7.9 |
| UST 10Y | 214.2 | 208.4 | -5.8 |
| UST 30Y | 258.2 | 257.2 | -1.0 |
| GERM 2Y | -65.9 | -67.0 | -1.1 |
| GERM 10Y | -20.2 | -25.7 | -5.5 |
| JPN 30Y | 45.4 | 37.9 | -7.5 |
| EURO$ Z9/Z0 | -40.5 | -27.0 | 13.5 |
| EURO$ Z0/Z1 | 8.5 | 7.5 | -1.0 |
| EUR | 111.71 | 113.35 | 1.64 |
| CRUDE (1st cont) | 53.50 | 53.99 | 0.49 |
| SPX | 2752.06 | 2873.34 | 121.28 |
| VIX | 18.71 | 16.30 | -2.41 |
https://www.nasdaq.com/article/lessons-from-the-1987-market-crash-cm41661
Carnage in short rate options
June 6, 2019
–The extraordinary rally in euodollars continues. In a little over a month, since early May, many contracts have rallied 55 to 70 bps, without an overt ease from the Fed and without any substantial catalyst. ISM data remains above 50, with yesterday’s services posting a solid 61.2. There has been no banking crisis. Corporate spreads aren’t exploding. No panic in stocks. Yet, EDH0 was 9857.5 in early May and now prints 9826.5, a rally of 69 bps. FFF0 has surged from 9775.5 in the beginning of May to 9831 now, a gain of 55.5. And remember, at 9775, the market was ALREADY projecting better than 50/50 odds of an ease by year-end. This contract printed 9836.5 yesterday, pricing three 25 bp cuts by year end. Trump may not know it from stocks, but interest rate markets are in the process of exerting severe pressure to make a China deal. Or, perhaps that’s the wrong interpretation….perhaps the market just wants inflation at any cost, and perceives the correct path to be slashing funding costs. Crude oil has not cooperated, falling nearly 20% since the start of May. I’m becoming so bearish on the long bond that my only choice is to avert my gaze.
–All back eurodollar spreads are now making new highs (from reds back). Red/gold pack spread closed at 43 yesterday, +2.75, a rally of close to 25 bps since the beginning of May. Eurodollar option volume has been heavy. However, several option market making groups have apparently stopped doing business due to the carnage. The liquidity of 1/4 bp markets that was taken for granted is not likely to be available in the near future. There has continued to be large buying of call spreads, for example, EDN 9800/9812cs settled 3.0 yesterday, trading over 100k with open interest increasing by nearly 70k in each strike. I find these levels ludicrous. However, if the first “insurance” cut occurs at the June FOMC, then anything’s possible.
–Employment data tomorrow following weak ADP of only 27k yesterday.
JAN 2020 Fed Funds
FFF0 now print new high 9836. It has rallied 50 bps just since May 21.
It’s 74 bps lower in yield than current Fed Eff of 2.38. THREE EASES BY END OF YEAR PRICED.
Aggressive ease pricing sees a pause
June 5, 2019
–Having aggressively priced Fed easing over the past several sessions, interest rate futures pulled back yesterday. The ten year yield rose 4 bps to 2.12%. Green euro$ pack fell 5.5 bps (weakest on the strip). However, October Fed Funds closed +2 on the day at 9801.0 or 1.99%, around 40 bps below the current Fed Effective. If there is only one ease by September this contract will decline about 15 bps. The press is pointing to Powell’s “act as appropriate” comments yesterday as providing support for stocks; the Fed is closer to an actual ease. Powell mentioned trade negotiations, which will, of course, be the excuse for the coming rate cuts. Obviously, shipping volumes have declined, starkly apparent in the share price of FedEx. This stock made a high in early 2018 of 270 and closed out the year at 160. It neared 200 in April of this year, but has revisited last years low since then, though it had a solid bounce yesterday, closing at 160. Bear in mind that last year’s low in SPX was sub-2400 vs 2800 now.
–EDZ9 closed at 9802.5. This contract is also reflecting several rate cuts by year end. Large new buyer of 100k EDZ9 9762p yesterday, settled 5.25 ref 9802.5. I’d be more inclined to sell that level with a delta hedge in FFV9.
–Interesting comment on leveraged loan risk by CEO of BofA Moynihan “It’ll be ugly for these companies if the economy slows down and they can’t carry the debt and then restructure it, and then the usual carnage goes on.” There hasn’t been much in the way of ‘usual carnage’ for a while. but the first part of that recipe, the slowing economy, is already occurring.
US 10Y yield at lowest since Trump was elected
June 4, 2019
–Now THAT was a proper rally. The strongest eurodollar contracts moved forward on the curve with EDZ9 and EDH0 leading, up 13.5 on the day. Credit Suisse was out early with a note saying the first ease might be in July, and Bullard followed, saying a cut might be warranted due to trade issues and low inflation. Powell speaks this morning on policy strategy; he’ll likely hint about a more rapid end to the taper. The 2-yr note plunged 10.2 bps to 1.842%, with tens down 6.2 to 2.08%. The 2/10 spread closed at a new recent high of 23.8 bps.
–So what do you do with the dot plot? At the March FOMC, the projected FF rate for the end of 2019 was 2.4%. That was down from 2.9% in December. The 2020 projection was 2.6%, down from 3.1% in December. Yesterday, EDZ19 settled 98.04 and January 2020 Fed Funds settled 98.275, rates of 1.96% and 1.725%. The June FOMC is a bit over two weeks away. Should the dots drop ANOTHER 50 bps to try to line up with the market?
–All ED calendar spreads from EDZ19 forward rallied. Red/gold pack spread gained another 8 bps to close at a new recent high of 40.75 bps (reds +11.5, greens +9.625, blues +6.625, golds +3.5). The metal gold has also surged as markets search for safety. October Fed Funds settled 9799 or 2.01%, about 40 bps lower than the current Fed Effective. Chance that the first ease is 50? (Oct funds cover June, July and Sept FOMC meetings). Call ratio spreads which essentially reflect the view that markets can rally slowly but are unlikely to surpass upper strikes, have blown up spectacularly. It’s hard to get this type of violent move without the fuel of forced buying. However, the back end of the market isn’t experiencing the same vol surge. Example, 0EZ atm 9837.5 straddle settled 51, ten bps more than 3EZ atm 9812.5 straddle at 41.0.
–As the chart below shows, the ten year is at the lowest yield since President Donald Trump was elected. Do lower long term rates save the economic environment when tech stocks are under regulatory attack and global trade is declining?
