Oct 5. Patel had the (Fed’s) number early
–Both the Indian rupee and the Indonesian rupiah are making new lows vs the USD for the move today. In the US, it’s Unemployment day. Is there any connection?
–The jobs data are expected to show NFP of 185k and yoy Average Hourly Earnings of 2.8%. It’s possible that results will be skewed by Hurricane Florence. So, if the market chooses to do so, it can explain away a miss in either direction, and fall back on the larger issue.
–Who were the first two central banks to openly complain (in op-ed pieces), that the Fed was removing global liquidity, thus hurting their economies? It was India, followed by Indonesia. In early June India’s Urjit Patel wrote in the FT “Global spillovers… have been playing out vividly since the Fed started shrinking its balance sheet. This is because the Fed has not adjusted to, or even explicitly recognised, the previously unexpected rise in US government debt issuance. It must now do so.” In June the rupee was 68 to the USD, it’s now 74. Shortly thereafter the same sentiments were echoed by Bank Indonesia’s Warjiyo. The withdrawal of liquidity hits the periphery first. Currently the US is seeing both stocks and bonds depreciate simultaneously. If the BIG issue is liquidity, then the employment number isn’t all that important, except that a strong wage number will give the Fed a green light to continue to tighten. Today it’s not the news, it’s how the market reacts. If the overarching issue is liquidity, and I of course, think it is, it’s bearish for everything.
–Along the same lines, Draghi met with Italy’s president Mattarella on Monday to discuss the budget (Rtrs). I saw a paper from Cumberland Advisors that says Italy has the third largest sovereign bond market in the world. Could that be possible? I don’t think so, but it’s still important, and can still impact funding issues. Finally, the China chip story (China infiltrated US systems with tiny computer chips) adds another layer of complexity to the trade issue, pushing resolution further away.
–Once again new highs were posted in near ED calendar spreads, with EDZ8/EDZ9 up another 3.5 bps to 56.5. EDZ9/EDZ0 is not quite at a new high, but gained 0.5 to close at 5.0. That’s quite a difference from the euribor curve, where ERZ9/EDZ0 is the peak, and notched a new recent high at 42 bps. In what was earlier this year called global synchronised growth, central bank expectations are anything but. I’ve heard a couple of comments about the market gunning for the big open short positions in long dated euro$ puts. If so, it’s only because underlying conditions allow the press. After a modest nudge higher in implied vol on Wednesday’s action, yesterday saw a surge to new recent highs, though premium is still low given the environment.
