March 7. Old headwinds fade, new ones emerge.
–The big news is Gary Cohn’s resignation, which increases odds of a trade war. Brainard’s speech (…Headwinds Shift to Tailwinds) tilted hawkishly, concluding that “Continued gradual increases in the federal funds rate are likely to remain appropriate…” She mentioned the weaker dollar, tight corporate spreads, equity valuations and fiscal stimulus, synchronized global growth.
–Equities had a sharp sell off after the Cohn news but remained above the low of last week, and treasuries rallied, but again, held below last week’s high. What appears to be increased isolation of Trump could develop into a larger story, which should provide more volatility going forward.
–Yesterday’s action was relatively muted, with yields edging higher. Treasuries were more or less unchanged, but the Green pack in the euro$’s (3rd year out), closed -2 on the day. Once again, the volume leaders on the ED strip were December contracts, with EDZ8 having volume of 362k and EDZ9 352k, 100k more than other contracts. There was buying of both EDZ8/EDZ9 spread and of EDZ9/EDZ0 spread. The former closed at 34.0, up 1 on the day, and the latter settled unchanged at 9.5, though there was a buyer of >20k at 10 late in the day which appears to be new. We are exactly 2 weeks away from the March FOMC meeting which will include new economic projections. Some may be wagering that deferred FF ‘dot’ estimates will be raised given fiscal stimulus measures. With just over one week before March midcurve expiration there were some straddle spreads traded, rolling from long March premium to June. 2EH and 3EH straddles were pressured, closing at 12 and 13.
–Next week we have treasury auctions of 3, 10, and 30 year paper. These auctions are bunched up in the beginning of the week, with 3’s and tens on Monday and 30’s on Tuesday. Today’s news includes ADP, Internat’l Trade, and the Beige Book in preparation for the upcoming FOMC. Comments by Dudley and Bostic as well.
