Sept 21. BoJ’s out, Fed up to bat next

–BoJ meeting not causing much of a market reaction with the yen (future) nearly unchanged but the curve steeper,   As the FT says, the BoJ intends to cap ten year yields and overshoot its 2% inflation target through yield curve control.  Something like that.

–This afternoon we await the Fed’s decision and press conference.  Though some shops continue to think a hike could occur, the overwhelming expectation is for no move.  However, there were some large trades done as a hedge.  For example, a buyer of 80k EDV 9887p up to 0.5 (trade was an exit).  I would note that Nov/Jan Fed funds spread closed at its high of 10.5 bps signaling approx 40% odds of a hike in Dec.  Oct/Nov ED spread settled 0.75, should be closer to 2.5 given the FF spread in my opinion.  There are several articles about the ‘dot plot’ and likely changes.  I’m not bothering with that particular exercise other than to note that the Fed’s forecasts have consistently been off the mark.  Many Fed officials have said they now believe the neutral rate is lower, and of course the ‘longer run’ dot average has declined to reflect this belated epiphany (which the market has been indicating forever).  My guess is that we’re coming very near to the point that the dots will invert with market pricing.  Which, as a friend often says, ‘will set the cat amongst the pigeons.’  By very near, I mean perhaps by Dec 2017, and specifically mean that the yield on gold eurodollars will exceed the average ‘longer run’ dot.

–DB made a new low yesterday and is not seeing a bounce this morning.  My belief is that a continued sell off will spill over into EUR weakness, a gratifying outcome for the ECB, but for all the wrong reasons.

Posted on September 21, 2016 at 5:20 am by alexmanzara · Permalink
In: Eurodollar Options

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