Sept 12. 5/10 flattening this year…run its course?

–Nearly all interest rate futures contracts settled unchanged yesterday, though in spite of a well received 30 yr auction, the bond future slid lower just after the floor close.  Weakness has been concentrated in green euro$ pack and the 5 yr note as the market anticipates “lift off”.  At the end of last year when the ten year yield had ramped up to 303, the 5 yr yield was 174.  Yesterday tens were 1/2% lower at 253, while 5s closed at 178, 4 bps higher.  Red/gold euro$ pack spread was 306 in Dec, now 204.  It has been a remarkable flattening.  When the Fed was raising rates from 2004-06 the curve also flattened and eventually inverted leading for many to call for a recession.  It was a very early call, but proved correct in a big way of course.  I think the back end of the curve has been steadfastly projecting growth at stall speed.  Perhaps an improved labor market will finally provide a spark?
–Anecdotal evidence runs both ways.  For example, Hollywood is having a terrible year, with ytd box office -5.6% and employment in the industry down significantly.  On the other hand, Ferrari revenues are +14.5% ytd.  Let them eat cake.  But they don’t seem to be driving those fancy cars.  If you look at Estimated Vehicle Miles Driven for the US it’s still down significantly from the highs in 2006, and even looks worse when adjusted for population.

From a global perspective, yesterday’s IEA report noted a large down shift in global energy demand.  From FT : “In its widely followed monthly report, the west’s energy watchdog said on Thursday that global oil demand growth had slowed to below 500,000 barrels a day in the three months to June – the first time it has reached this level in two-and-a-half years. …“While much attention has been paid to the relentless growth in North American unconventional supply, demand headwinds have perhaps been less widely noticed,” the IEA said in its report. “The recent slowdown in demand growth is nothing short of remarkable.”   Maybe it’s just China and the EU.  Shanghai rebar made another new low and I believe I saw that iron ore prices are down 38% on the year.
–In terms of yesterday’s price action, crude had a huge day, first sinking to new lows for the move, then posting an outside day with a higher close, +1.57 late.  In the short term, selling pressure has been shut down in oil.
–Retail Sales today expected +0.6% and +0.4 less autos and gas.

Posted on September 12, 2014 at 5:44 am by alexmanzara · Permalink
In: Eurodollar Options

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