Calm before the storm
Nov 27, 2019
–Even as stocks continue to make new highs, yields are falling. Tens fell a couple bps yesterday to 1.738%. New lows in several euro$ one-year calendars, for example EDM0/EDM1 closed down 0.5 at -19.0 and EDU0/EDU1 down 1 at -11.5. On November 7, this latter spread had actually edged into positive territory, closing +0.5. As several Fed officials have recently indicated policy is now appropriate, the front contracts are limited to the upside while backs press higher. This can also be seen in straddle spreads as near (white) straddles compress while long-dated reds and greens move higher. This was specifically noted by friend BC on the floor: EDM0 9837^ went from 31 on Nov 4 to 26 now, while EDM2 9850^ went the opposite direction, from 78.5 to 84.5 over the same time period. The election and possible political upheaval is likely firming up long dated vol.
–Given next year’s election, the Fed would probably want to ease, if needed, as early as possible in the year. Somewhat surprising that April FF only trade 9851.5, a premium of just 7 over the expiring November contract. There are FOMC meetings in late Jan and mid-March. As a comparison, EDH0/EDM0 prints -10.5.
–Chart below shows long term breakout on BRL. The Brazilian currency is weakening in spite of intervention. That chart portends much further weakness in the real.
–In the US, news today includes Durables and Core PCE prices, expected +1.7% yoy. 7 year auction.
