“Accommodation” strategies are running out of room
May 12, 2021
–Tens rose 2 bps to 162.4 in front of today’s auction, with CPI looming this morning. On the eurodollar strip, greens through golds settled down 2.5. New recent high in 5/30 just over 155, which is still about 10 away from the high of the year. Ten year tip breakeven made another new high at 254 bps. FT notes that China’s Producer prices leaped in data released yesterday, “the price of raw materials and goods leaving its factories rose 6.8% yoy”. Brainard’s speech yesterday suggested patience and uncertainty about the path forward, though she added this reassuring remark: “I will be carefully monitoring measures of longer-term inflation expectations to ensure they are well anchored at 2%. To date, various measures suggest inflation expectations remain well anchored and broadly consistent with our new framework.” What does that even mean? “Broadly consistent” leaves a lot of room for markets to test the Fed’s reluctance to withdraw accommodation. The June FOMC is one month away (16 June) and will undoubtedly feature a contentious press conference.
–There were a couple of notable trades in dollars, a new buy of 35k EDM2 9962/9937 put spread for 2.25 to 2.5, which settled 2.25 vs 9976.0 in underlying EDM2. Also a block sale of 25k EDZ2 at 9961.5 which appears to have been an exit judging from the decline in open interest.
–The news media has latched on to the inflation story as the main woe confronting equity markets. Although stock futures are again lower this morning, treasury prices are barely positive. ESM currently -16 at 4130.25 while TYM is +2.5 at 132-17. However, grains are continuing a sizzling rally with July Beans up nearly 30 cents to a new high 1644. One month ago the contract was 1375.
–While news reports are glossing over the bombing of Israel, it appears as though serious escalation is brewing in the mideast, likely a net negative for stocks. In many ways, geopolitical events are threatening to overwhelm the administration at the same time that markets overwhelm the Fed. Accommodation strategies are at the end of the runway.
