Nov 17. Full Employment and Wage Growth….but Yellen’s not sure
–Top billing this morning goes to Yellen, who will appear before the Joint Economic Committee, with the text of the speech to be released 2 hours earlier at 8am EST. Odds for a December rate hike are already cemented. However, the possibility of another move in March is barely priced, with Feb/April Fed Fund spread at 2.5/3.0 late in the day (FFG7/FFJ7). Settlement of 3.0 represents a mere 12% chance of hike in March. While Yellen’s trepidation about forward economic and labor prospects always shines through, it’s worth taking a look at the last Wage Tracker chart from the Atlanta Fed showing acceleration to 3.9%. The mandates of full employment and increasing inflation both appear to be in place. https://frbatlanta.org/chcs/wage-growth-tracker/?panel=1
–Yesterday the ten year yield rose in the morning, falling just shy of Monday’s high 230. The five year yield actually edged to a new high for the week of 173.4 (180 to 185 has been a 3 year cap), but by the end of the day tens fell back to 222 and fives to 167 as positions squared in front of this morning’s testimony. The dollar is close to breaking out to new highs as cracks are appearing in many parts of world. For example, Prince Alwaleed mentioned the idea of the Saudis cutting the USD peg (in the future). Mexico is expected to raise rates. There are concerns about Malaysia instituting capital controls. Bitcoin is again near the top of the range. And of course the yuan has been depreciating. A breakout to new highs in the dollar index (DXY) will likely be taken hard by US equity markets.
–Still underlying bids in long dated green straddles in dollars. Somewhat interesting?? …back in mid-October, EDU9 (Green Sept) was trading around the 9862.5 strike and the atm straddle was right around the strike price (that is, it was trading 86), which seemed cheap for the longest dated green. On the other hand, a price of 9862 is a yield of 1.38% and 86 is a big chunk of that. Since the election, the yield has gone up to 2% (EDU9 closed 9804.5) and the atm straddle is now 103.5. On the other hand, the change in yield has been 42% (from 1.375 to 1.955) and the atm straddle has only expanded by 20%. Clearly the change in atm straddle prices shouldn’t match the change in yield, but the underlying bid for longer dated premium in the back end of the dollar curve is certainly understandable.
–Other news on the day includes CPI expected +0.4 and Core +0.2. Housing Starts expected 1.156k. Jobless Claims 257k and Philly Fed 7.8 from 9.7.
–Interesting link from ZH on the disaster of Illinois pensions. http://www.zerohedge.com/news/2016-11-16/illinois-pension-funding-sinks-376-unfunded-liability-surges-130bn
