Break on through…
Oct 29, 2019
–In spite of continued signs of a weakening economy, yields rose with tens up 5 bps to 1.851%. Chgo Fed National Activity Index was -0.45, near the lower end of the past year’s range, and Dallas Fed Mfg was -5.1 vs expected +1.0. Stocks broke through to new highs. (We chased our pleasures here/Dug our treasures there). No one left to sell with anemic volume. But here’s some news: THE FED’S GONNA CUT.
–There are several articles indicating the Fed will cut tomorrow, and if they don’t, markets will be shocked! Of course, short rate futures have priced high odds of a cut for quite some time. For example, Oct/Nov FF spread settled -22.25 bps yesterday. Markets have been have been leading the Fed. But here’s the interesting part, the forward spreads are pricing much less certainty of more easing. For example, Nov/Jan Fed Fund spread, which prices the December FOMC, settled at -7.75, about 1 in 3 chance for another hike. EDH0/EDM0 three-month spread also settled -7.5. Yesterday, all near one-year euro$ calendar spreads made new highs, with EDZ9/EDZ0 up 2.5 to -32.0 and EDH0/EDH1 up 2.0 to -16.5. (EDZ9/Z0 was as low as -57 in early Oct). So yes, the markets have guided the Fed to tomorrow’s cut, but the FORWARD guidance coming may also sync up between Powell and pricing. Clearly, the new high in stocks takes away any urgency for easier policy, and 2/10 spread ended at a new high above 20 bps.
–EDZ9 settled 9808.5 or 1.915%. Yesterday, 3-month libor was 1.9355, with Fed effective 1.83% and SOFR 1.85%. EDZ9 to FFF0 settled 38.0, holding the recent range of 36 to 41. If the basis stays constant, then EDZ9 is pretty well priced…also indicating fairly low odds of additional ease. It’s worth noting, especially with this contract, that the Dec FOMC is on the 11th, prior to expiration on the 16th (midcurves expire Friday the 13th). This of course, is NOT A RECOMMENDATION, but EDZ9 9812/9825cs settled 2.75 and the 9812/9825/9837 call fly settled 1.5. The call spread seems to have a slightly better payoff profile than FFX/FFF without the open ended risk.
–China ten year keeps edging higher in yield, now 3.32% as inflation rises due to pork prices, which have exploded due to swine fever. The yield has risen even as economic data remains soft. I am just a distant observer of China, but it would seem as if asset price inflation in the US might possibly exert the same directional push to yields…
