Powell and NFP save the day

–Yields rebounded strongly from Thursday’s plunge as the Employment report showed continued strength and Powell re-assured the markets that the Fed would act flexibly.  Stocks surged.  NFP was +312k with yoy hourly earnings +3.2%.  The ten year rose 10.4 bps to end at 265.7.  Red through gold euro$’s were down 13-15 bps, though prices are still a shade higher than Wednesday’s close.  Implied vol was hit on the pullback as longs pared back positions in both futures and premium.  Open interest in virtually all interest rate contracts was down significantly, except for bonds and ultras which saw modest increases.  Two-year fell 135k, five-yr -52k and tens -17k. 

–Near euro$ calendars rebounded as well.  EDH9/EDH0 closed -19.5 (+7.5 on day) and EDM9/M0 -23.5 (+4.5).  Both were -27 or lower on Thursday.

–This week brings auctions of 3, 10, 30 years, with Fed minutes on Wednesday afternoon.  There are a bunch of Fed speakers, starting with Bostic today, and including Powell and Clarida on Thursday.  The Fed’s balance sheet is becoming a much larger topic of discussion.  While the Fed prefers to let the run-off occur in the background, the financial press has belatedly brought issue into the foreground, as the move to shed $50 billion per month beginning in October exactly coincided with the slide in stocks.  There’s a fair amount of economic jargon regarding the effects of balance sheet reduction but I would say this: QE and QT work primarily on stocks, not bonds.  Stocks like liquidity.  The removal of liquidity is a headwind to equities which tends to support bond prices.

–Probably worth noting that the US Navy has sent a ship into the Black Sea to heighten tensions with Russia, while at the same time sailing warships in the disputed waters of the South Sea. (How many of these boats do we have?) The issue of border patrol apparently goes way beyond the wall.  Gold has no boundaries and is once again staging an assault on 1300. 

Posted on January 7, 2019 at 5:13 am by alexmanzara · Permalink
In: Eurodollar Options

Leave a Reply