Oct 4. Sweet Loretta
–Extremely quiet Monday marked by slight weakness in both stocks and bonds. While ISM was stronger than expected at 51.5, a host of other indicators point to a slowing economy, including a stall in auto sales, slowing restaurant sales (“Broad-based declines in the current situation indicators caused the RPI to fall below 100 for the first time in eight months,” ) and a drop in the Atlanta Fed’s GDP Now to just 2.2% for Q3, the lowest yet in the cycle. Bloomberg notes that Manhattan apartment sales have dropped 20%.
http://www.restaurant.org/News-Research/News/RPI-drops-into-contraction-territory
http://www.bloomberg.com/news/articles/2016-10-04/manhattan-apartment-sales-plunge-20-as-homebuyers-get-pickier
–Notably crude was up 42 cents late to 4924, building on last week’s rally, though this morning a strong dollar is erasing those gains. Once again, each day that passes going forward, crude oil will start to show higher and higher yoy percentage changes. Unsurprisingly, market based measures of inflation expectations are already rising, including the 5y5y inflation frd swap and the spread between the ten year inflation indexed note and 10y treasury, which I marked at a new high yesterday of 164 bps.
–In all, we appear to be in stagflationary environment, which, of course, caused Loretta Mester to say that a November hike is a possibility. It’s not. An earlier speech by Dudley was softer. He said that regulation didn’t appear to have a noticeable effect on liquidity, though he obliquely mentioned the rise in libor associated with MM reform. Right…no effect on liquidity…until you NEED it.
–Nov/Jan FF spread settled at a new high of 13.5, high for the cycle and squarely targeting Dec for the rate hike.
–Though some have referred to this Friday’s employment report as ‘critical’, the market doesn’t seem to care very much as the Friday expiration 131 straddle was only 39/64’s late. Interestingly, there was an 8 bp jump in Italian 30 yr bond yields as Italy announced plans to sell a 50 yr issue (which will likely be funneled into the banking system for a new rescue). Taken together with the BoJ’s decision to target tens and let the back end of the curve seek its level, and increasing market based inflation signals (occurring in the UK as well as the pound makes new lows and the FTSE soars), there’s an increasing argument to be made that curves will steepen.
