March 19. EDH8 off the board; rolling ED spreads at new lows
–Big event of the week is Powell’s first FOMC meeting as Chairman on Wednesday. There are some concerns that FF projections will move somewhat higher, but there is no shortage of potential news stories that could be identified as market drivers over the next week. For example, domestic political intrigue continues with speculation Trump could fire Mueller. Trade tensions with China are still simmering “…as U.S. Treasury official David Malpass said he misspoke hours after claiming the U.S. was pulling out of decade-old formal economic talks with Beijing.” (BBG). Mnuchin is still holding high level talks with the Chinese. In other central banking news, China named Yi Gang as the new head of the Central Bank (US educated, pro-market reformer). There is some speculation that China wants to be more aggressive in dealing with bad debts and get the pain over with in the short term. On the other hand, the ECB last week postponed implementation of rules for banks to deal with non-performing loans until 2021. (Thanks Joe, for Armstrong link).
At that point it will probably fall into Weidmann’s lap. The bigger theme here is that bad loans and malinvestment, which have lingered since the crisis or been exacerbated by low interest rates, are likely to be addressed in the next couple of years in one way or another by new central bank heads. Probably not a benevolent environment for stocks.
–EDH8 expires today. On Friday US rates moved higher, with tens +2.7 bps to 284.6. Greens and blues were weakest on the dollar curve, closing -4.0. New low in 5/30 at 43.7 bps. With June’19 as the new first red, all rolling pack spreads will be at new lows. Red/green marked at 9.375, green/blue at just 3.5 bps. April treasury options expire Friday. One looming question going forward is whether the curve will bull steepen on a hard stock sell off. I think so, but Powell’s stance on Wednesday may provide clues as to how he might respond to asset drops.
