When is an easing cycle not an easing cycle?

Aug 1, 2019

–The Fed cut 25 and ended balance sheet run-off, pretty much as expected.  However, Powell caught the market off-guard with comments that indicate he’s the only one that doesn’t yet realize the Fed is in an easing cycle.  Stocks tanked and the curve flattened dramatically.  The two year yield rose 4.4 bps to 1.892 while tens fell the same magnitude (-4.5 bps) to 2.016.  Near euro$ contracts were slammed, with EDH0 and EDM0 weakest at -7 bps.  Red pack fell 4.875 bps, golds were up 5.625 for net change in pack spread of 10.5!   New recent lows in calendars from reds back.  EDZ9/EDZ0 printed -44, but settled -41.5. 5/30 treasury spread fell about 5.5 bps but is still holding upward sloping trend line (attached).  At settlement, FFQ/FFV (Aug/Oct spread which gives an indication of odds for September’s FOMC) was 15.25 from -17.25, bringing it closer to 50/50 for another 25, (but still leaning toward ease).

–The dollar index made a new high for the year with EUR and GBP weaker yet this morning and racing for parity with USD.  Global USD debtors will have a harder time servicing loans.  10 year Bund traded record low -44 bps yesterday.

–Now attention will focus on the employment data on Friday.  Today ISM Mfg expected 52.0 vs 51.7 last, and Prices 49.0 vs 47.9 last.  I can’ t help but think that upcoming treasury auctions will also start to become more important than they have been.  

–There were some large option adjustment trades, of which I will mention a couple.  Buyer of 50k EDZ9 9812c for 5.0 (new), settled 4.5 ref 9785.5.  Also paid 2.5 for 25k for same strike in Oct, also a new position.  Late new buyer of 25k 2EZ 9937/9962cs for 0.25.  Disaster trade.  Could things unravel by the end of the year?  Brexit.  ECB handover to Lagarde, stalemate of China/US trade with more chances of military accident, EM crisis due to dollar shortage, Iran military response.  I prefer just owning something like 2EZ 9825c for 0.5.  Sure, they’re 95 bps out of the money.  But there are worse ways to spend half a tick.

Posted on August 1, 2019 at 5:16 am by alexmanzara · Permalink
In: Eurodollar Options

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