April 2. Easter Monday (thin conditions)
–Stocks seeing some pressure this morning as China retaliates with tariffs on US products (and Trump shifts attention to Mexico).
–On Friday all measures of the curve made new lows. The peak one-year euro$ calendar spread is EDM8/EDM9 which settled at 3/8% (37.5 bps). The next year out, EDM9/EDM0 settled at 1/8% or just 12.5 bps. A comparison with Fed Fund contracts clarifies the effect of the libor widening, as July’18 to July’19 FF spread closed 48.5, or 11 higher than EDM8/9. In any case, all spreads made new lows, with red/gold pack spread at just 13.5 bps. Same with the treasury curve, as 2/10 closed 47.3, -1.4 on the session. For the first time, a euro$ calendar spread settled negative, with EDZ0/EDH1 at -0.5.
–Typically, a rout in the stock market would provide some support to the curve as the Fed would be expected to take a step back from the idea of tighter policy. However, Powell has tried to separate stock valuations from the broader economy, and may expound on that theme during Friday’s speech to the Economics Club of Chicago. Employment data is also released Friday. Today brings ISM Mfg, expected 60.0 from 60.8.
–Albert Edwards of Soc Gen considers the idea that Trump may threaten the Fed’s independence if the economy turns down. According tp the Richmond Fed website: “…the Federal Reserve derives its authority from the Congress of the United States. It is considered an independent central bank because its monetary policy decisions do not have to be approved by the President or anyone else in the executive or legislative branches of government. …the Federal Reserve is subject to oversight by the Congress, which often reviews the Federal Reserve’s activities and can alter its responsibilities by statute.” In a 2010 speech Bernanke felt compelled to defend the Fed’s independence: “Chief among these aspects has been the ability of central banks to make monetary policy decisions based on what is good for the economy in the longer run, independent of short-term political considerations. Central bankers must be fully accountable to the public for their decisions, but both theory and experience strongly support the proposition that insulating monetary policy from short-term political pressures helps foster desirable macroeconomic outcomes and financial stability.” Expect some echoes of this speech over the coming months from Powell.
