Sept 24. FOMC week

–This week brings the Sept FOMC on Wednesday.  Treasury auctions 2, 5 and 7 year notes on Monday, Tuesday and Thursday.

–WTI Crude at a new high this morning, +1.40 to 72.18.  Looks like an upside breakout which should force short covers.  Inflationary or headwind to growth?  Both, but perhaps leans more heavily toward the former.
–Yields fell modestly Friday with the ten year -0.8 bp to 306.6.  On the eurodollar curve, reds were the strongest closing +2, with greens +1.5 and blues +1.25.  Red/green (2nd to 3rd years) remains inverted at -0.625 bp, however, the tide appears to be turning as this pack spread was -4.375 bp one week ago Friday.  With the 2 year today, perhaps there will be relative pressure on reds; reaction to the FOMC presser will be key.  Given strength in equities and the labor market, Powell will likely stick to the message of gradual hikes.  Indeed Friday’s buy of 40k EDM9 9687/9675/9662p fly for 2.3 to 2.5 suggests hikes at every quarterly meeting going forward.  The inversion of reds/greens projects the idea of a slowing economy in 2019 with the possibility of recession.  If this part of the curve goes positive after the FOMC, it will signal a large sentiment change.
–Before the turn of the century, turn of the year pressure seemed to peak in October, as a jump in 3m libor (as soon as it covered the end of the year) focused attention on protection strategies.  Last year selling pressure on the December contract occurred a bit later in the cycle.  December 31 is a Monday, so technically the turn doesn’t cover the weekend.  I would only note that EDZ8/FFF9 spread closed -0.5 Friday at 29.5, down 0.5 on the day, but the bias appears to be higher, as it’s up a couple of bps on the week.
–Chicago Fed National Activity Index today, expected 0.02 from 0.13.​
Posted on September 24, 2018 at 5:20 am by alexmanzara · Permalink
In: Eurodollar Options

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