Fed steadies the market
Sept 19, 2019
-Fairly subdued FOMC day. The Fed cut 25 as expected and trimmed IOER, but neglected to institute QE. The NY Fed announced a $75b repo operation the third day in a row for this morning to satisfy funding requirements. The euro$ curve flattened, with EDZ9, H0 and M0 all closing down 0.5, while EDZ0 back rose 0.5 to 2.5. October FF settled 9811, but quickly traded down to 9810 after settlement, a signal that funding issues linger. I had calculated a final settle of 9796 for FFU9 on an ease, but it stubbornly remains 3 bps lower at 9793. The market wants QE and buybacks. Powell referred to “organic” balance sheet growth, but that’s not satisfactory. It’s possible that QE could be re-started before the next FOMC if quarter-end is sloppy. MSFT obliged on the buyback part with a program of $40 billion. FDX plunged 13%, supporting the narrative of slower global trade and growth, yet UPS and EXPD remain close to recent highs.
–Implied vol eased. EDZ9 9800 straddle eased to 22.5 from 24.5 on Tuesday and EDH0 9825^ from 36.5 to 34.5. Late buyer of 20k EDZ9 9825/9837/9850/9862 c condor for 0.75. Nov FF settled 9822, so the market still sees odds for another ease at the end of October at around 40% (assuming a new Fed Effective of 1.88%).
–Today’s news includes Philly Fed expected 10.5 vs last at 16.8. Jobless Claims, Leading Indicators and Existing Home sales, expected 5.38m, round out the data. October treasury options expire Friday.
