FOMC. Policy in good place. Primary risk is trade policy.
Dec 11, 2019
–FOMC today. No change in stance expected barring an exogenous shock; policy is in a good place. CPI is released this morning, expected +0.2 with yoy Core 2.3% from 2.3 last. The average of the last twelve Core CPI readings is 2.18%. It hasn’t been below 2.0% since February of 2018. Why not just claim victory on the inflation target and let it go at that…
–Rate futures traded on the weak side coinciding with the ten year auction, although the losses were in the front end of the curve with 2’s up 2.9 bps to 1.654% and tens up just 0.6 bp to 1.835. Red Dec (EDZ0) was weakest on the eurodollar curve, settling -3.0 at 9840.5, the lowest close since Nov 12. Interestingly the dollar index is also forecasting further softness.
–Perhaps the Fed will more specifically address end of year funding pressures, as Zoltan Poszar from CS released a note indicating that the Fed hasn’t done enough to stifle the risk of a surge. In a way, EDZ9/EDH0 at -17.5 reflects this concern. Ordinarily, an inverted front spread is simply pricing the chance for a near-term Fed ease. However, April FF are only at a 4.5 bp premium to the current EFFR (FFJ0 98.495 or 1.505% vs EFFR 1.55%) so that’s only about a 20% chance of an ease in Q1. Additionally, front ED straddles continue to compress, indicating comfort with the idea of a Fed on hold through election year. EDH0 9825^ settled 10.5 vs 9828, EDM0 9837.5^ 22.0 vs 9836 and EDU0 9837.5^ 31.5 vs 9841.5. There has been a consistent seller of EDU0 9837/9850 straddle strip from 66.5 to 66.0; settled 66.0 yesterday. Having said that, there have been many targeted upside plays for continued (forced) easing, for example, the large long in EDU0 9887/9937 call spds bought from 4.5 to 5.5. Yesterday this idea was added to with lower strikes, paying 5.5 for the 9875/9925 cs.
