Labor market strong. Inflation high. We’ll keep rates at zero.
July 29, 2021
–At yesterday’s futures settlement, yields were higher, with tens up 2.5 bps at 1.26% and the green eurodollar pack (3rd year forward) the weakest on the strip at -6.5 bps. However, as Powell’s presser was digested, yields again slipped lower. For example, green Dec, EDZ3 was 9904.5 at 3:00pm settle, but quickly floated back to 9909.5 nearer to the electronic close. Some of Powell’s comments were bearish, noting that the labor market is quite strong as are current inflation numbers. However, he refused to call a start date for tapering. Today should provide almost comedic evidence that removal of accommodation is long overdue: Q2 GDP is expected 8.5%, yet the NY Fed is scheduled to buy $2.025 billion in 22.5 to 30 year treasuries, with the 30-year bond yield around 1.9%. A twitter comment by Michael Ashton touches on another aspect of the inflation debate: “…we are going to find out on Thursday that money velocity rose at about a 10% rate in Q2 unless GDP is a lot weaker than the forecasts suggest.”
–After the hawkish June FOMC, the dollar rallied and gold dropped hard. Yesterday DXY eased, and gold is seeing signs of life. GCZ1 had been churning around 1800 in the last few sessions, but has popped to 1825 as of this writing. Perhaps that’s due to the FOMC, but another factor could be Biden’s comments saying a shooting war with a major power could be the outcome of cyber-attacks. The world seems to be moving towards cyber disruptions as an acceptable form of conflict, but if Biden wants to fight the last war with conventional boots on the ground infantry, I guess it’s appropriate to grab a musket and turn to the old-time conventional hedge. Of course, the new hedge is holding its own as well, with bitcoin around $40k.
–There are reports that Softbank is selling Uber shares to cover for losses on Didi. China Evergrande has been downgraded by Fitch and S&P. Just a reminder that losses in one place can sometimes cause forced selling in another, even though China convened bankers yesterday to signal an end to the rout.
–Implied vol in treasuries was crushed yesterday. TYU 134.25 straddle settled 1’23, versus 1’32 in atm 134.5^ Tuesday. ATM USU straddle from 3’58 to 3’40. No news until Jackson Hole?
