Done with austerity
Nov 22, 2019
-Reuters reports that President Xi wants to work out a Phase I deal, but isn’t afraid to retaliate if necessary. Right out of the Trump play book. Christine Lagarde gave her first speech as head of the ECB, but avoided monetary policy and said the ECB must generate internal domestic demand through public investment. The age of austerity is over, I guess. Today’s US news includes Markit PMIs, expected 51.0 for Services and 51.4 for Mfg.
–January 2020 FF settled 9845.5, down 1. This is just 1.25 higher than expiring November. While it appears to be a cheap play for a possible ease in December, a client pointedly asked me, “what happens if the turn is 3%.” Because Jan 1 is included in the turn rate, if the Fed effective on Dec 31 were 30 bps above the normal EFFR, it’s worth 1 bp to the FFF0 contract. This makes FFF0 a bit dicier of course, and shifts focus to Jan ED, EDF0, which is well past the turn and settled 9818.5 vs EDZ9 9809.75 and EDH0 9832.0. FFG0 /EDF0 settled 30.0, while FFJ0/EDH0 settled 22.0. I use Feb and Apr FF because both are right after FOMC meetings.–Implied vol continues to languish, especially in longer dated treasuries, as 5/30 spread edged to a slight new recent low of 62 bps.
–EDZ0/EDZ2 settled 3 bps, 98.515 vs 98.485. In euribor ERZ0/Z2 settled 16.5, 100.415 vs 100.250. Lagarde’s public investment message might further widen the spread in europe.
