Fed day
Oct 30, 2019
–Slight decline in yields yesterday amidst light volume, tens fell 1.8 bps to 1.833%. There were a couple of notable upside trades in eurodollars, a buyer of 40k EDM0 9912/9925 call spread for 1.0, which would pretty much require cuts at every one of the next four FOMC meetings (after today’s) to fill out, and a buyer of 30k 0EF 9875/9900 call spread with 0EH 9900/9925 call spread for 6.25 as a package (settled 5.25). These midcurve call spreads expire next year with EDH21 as the underlying, which settled 9846.5. At the end of August, this contract traded as high as 9894.0. In spite of stocks trading near record highs, some are expecting impeachment proceedings to gain traction, and are worried about the ramifications of Warren’s ascent. Which brings us to today’s FOMC outcome, priced for a cut of 25 bps. As mentioned yesterday, the forward calendars suggest the Fed may be much less inclined to ease going forward. For example, EDH0/EDH1 settled -16.5, near the top end of the range. Buying calls on EDH21 is a modified sale of EDH0/H1; perhaps not a bad way to express the idea.
–Forward guidance will likely fall back on ‘data dependency’. A standing repo facility will likely be discussed but not yet implemented. The fact that the Fed is flooding the system with liquidity to hold down a rate that otherwise appears to want to go up suggests easing; further actual rate cuts can be de-emphasized. Today also brings ADP expected 120k and Q3 GDP expected 1.6 to 1.7.
