Sept 8. FOMC Conditions, Sept 2015 to Sept 2016

Just a couple of thoughts about the FOMC meeting on Sept 21. Going into the September 2015 FOMC on Sept 17, the Fed had been prepping the market for the possibility of a hike.  Ultimately, the Fed passed on a move in September and instead hiked in December.  We’re facing a similar situation now.  However,  as can be seen on the chart samples below, there was a degree of stress in 2015 which is not evident today.

For example, in August of 2015 China devalued. The idea of tighter financial conditions weighed on US equities (SPX was around 1950 as opposed to 2180 now), and was an especially unwelcome prospect for emerging markets.  As can be seen in the second panel, EEM and hi-yield had been selling off from June until September of 2015.  In contrast, both markets have now been rallying since June.  The third panel below shows that the Five Year Treasury yield was around 1.50% in Sept of 2015, but is now only 1.20%, in spite of the intervening hike.  The 4th panel below is the spread of the 2nd red to 2nd green eurodollar one-year calendar.  Note that in September of 2015 this spread was around 55 bps, now it’s less than one quarter of that level at a mere 12 bps.

From a cursory review of these charts, there appears to be nothing which would stop the Fed from hiking now. Risk markets are faily well juiced, and the five year yield indicates an expansive policy.  The odd man out would appear to be the flatness of the eurodollar curve, as inflation expectations just don’t seem to have taken hold as yet.  Most other indicators provide a green light for a rate hike now.

CHART 1 is SPX…look how much higher we are now!
















CHART 2 is EEM and HYG …both higher now that in 2015

















CHART 3 is DXY (dollar index) and Five Year Treasury Yield

















CHART 4 is 2nd Red to 2nd Green Euro$ calendar spread (Now EDZ17/EDZ18)… flat







Posted on September 8, 2016 at 1:23 pm by alexmanzara · Permalink
In: Eurodollar Options

Leave a Reply