Sept 18. FOMC announcement and economic projections
–FOMC this afternoon with announcement at 1:00pm Chicago time and press conference at 1:30. Economic projections will extend to 2016. Housing Starts this morning expected 915k.
–Steepening in the eurodollar curve yesterday pretty much tells you everything you need to know about consensus: strong forward guidance through 2015 and a small 10-15b tapering with additional moves being data dependent. The first ten euro$ contracts were very well bid (2.5 years), with red pack leading the charge at +4.75 on the day. EDU4 open interest rose 68k as one buyer lifted about 100k up to 99.505 within the span of a few minutes. The 4th and 5th year contracts, blues and golds, actually closed lower on the session, -2.25 and -2.75. So, the ‘new’ red/gold pack spread rose 7.5 bps to nearly 294, only 4.5 bps shy of the high of the year. It occurred to me that the Fed might tacitly greenlight the steepening, as higher long end rates might help pension funds painlessly recover a portion of unfunded liabilities. However, I think risks to the housing market outweigh the positives on that strategy.
–Here is what I think is NOT priced into the market. 1) the possibility of a move in the unemployment threshold to 6% 2) a delay in the onset of tapering 3) much slower than expected economic growth in 2H. As fears of an aggressive tapering and accelerated FF tightening schedule have receded, the dollar has weakened, emerging markets have shown improvement, (pulled back from the abyss), and stocks have continued to strengthen. However, precious metals and the CRB have fallen. On balance, it would seem to argue for an extremely gradual adjustment by the Fed.
