No political agreement, but market signals agree: Curve is steepening
December 19, 2019
–With the impeachment vote, the House was able to send a really important message to Trump that they just don’t like him. Stocks remain near all-time-highs this morning, and bonds are lower; the market has concluded that more gov’t stimulus is likely to result.
–Great interview yesterday with Stanley Druckenmiller and BBG’s Eric Schatzker. Druckenmiller is: Constructive equities because of the fiscal, monetary and employment backdrop. Long equities, short bonds, long some commodities (include copper) long commodity ccys.ES: Central banks are determined to get inflation above 2%. “Does inflation matter?”
SD: There are 14 recognized measures of inflation, 12 are above 2%. The Fed’s preferred measure PCE is 1.7%. The Fed is taking tremendous stability risks with these policies. Finally, “You cannot have capitalism if you don’t have a hurdle rate for investment.”
–Regarding the long copper position, note that yesterday BBG updated a note on Gundlach’s indicator of the copper/gold ratio as a correlated leader of the US ten year yield. I posted an updated chart on twitter…both pointing higher.
–In terms of market action yesterday, new recent highs in several measures of the curve. Most importantly, 2/10 made a new high for the year at 28.7 bps, up 3 on the day. Red/gold pack spread also at a new recent high at 27.875 (this is not a new high for the year, that was at 43 in June). Surprisingly, there is no reach, YET, for puts. I would make another quick observation that ERH21/ERH23 posted a new high at 24.0. Almost everything is pointing in the same direction. Hard to ignore.
–Large action in ten year options was a roll down of TYF/G 130 call calendar into the 129 call calendar. TYF 129c settled 3 and TYG 129c 18 vs 128-055. Jan options expire one week from tomorrow. In euro$, buying of EDH0 9825/9837/9850 c fly for 1.25. There is relentless long accumulation of EDU0 9875c. Yesterday, +30k EDU0 9875/9900cs vs 9812.5p. This package settled flat, 4.50, 2.25 and 2.25.
–Finally, today Sweden’s Riksbank ended five years of negative rates by hiking to zero.
