Stocks resist economic signal from oil
Feb 10, 2020
–Crude oil (CLH0) is sub-50 this morning, having started this calendar year in the lower 60’s, yet stocks aren’t inclined to follow the economic signals of decreased demand and instead seem focused on central bank liquidity measures. Copper (HGH0) has settled in at lower levels above 2.50, currently near 2.56 vs 2.85 early in the year.
–Here’s an outlier that’s worth mention: Norway, whose central bank targets 2% core inflation (as most CBs do) reported a core inflation number for January of 2.9% yoy vs expected 2.0%. Norges Bank had said its key interest rate is expected to remain on hold for the foreseeable future, but has also warned that a sustained uptick in inflation could cause tightening. Yes, that sort of reading is unlikely in the US. But would it fall under the “catch-up” category?
–As mentioned over the weekend, Quarles’ speech on Thursday evening suggesting that the Fed could open the discount window to allow banks to use Level 1 HQLA to meet reserve squeezes alleviated pressure on December contracts that are prone to year-end pressure. EDU0/Z0/H1 butterfly fell 2.5 bps on Friday to 5.0. In general, yields declined, with tens falling 6.4 bps to 1.58% as growing virus fears persist. In eurodollars, reds through golds rose 5.5 to 6.5 bps. Implied vol firmed on the bond rally; the fear factor is for lower rates.
–While there’s not much news today, it should be an interesting week, with Powell testifying to Congress on Tuesday, auctions of 3s, 10s and 30s also beginning Tuesday, inflation data and retail sales on Thursday and Friday. While Quarles’ proposal is not current policy, it should, at the margin, improve domestic bank demand for treasuries. On the other hand, the only bond that has positive carry in comparison to the IOER rate of 1.60% is the thirty year bond…
