Nov 18. The line in the sand is somewhere right around here…
–Yellen’s comments convinced analysts that a Dec hike is in the offing. Jan’17 FedFunds went from 9938.5 bid to 9938.5 offer. In other words, Dec is, and has been, priced for a hike. However the dollar is on a tear, with DXY breaking out to fresh highs, and signs of stress are percolating in emerging markets. The continued depreciation of the yuan (CNY 6.89) and decline in oil and other commodities due to dollar strength is disinflationary. Recent moves are driven by a change in sentiment and off-sides positioning, but at this point are stretched, as interest rate futures continued to tumble late yesterday and this morning. So where is the line in the sand? The euro has fallen nine days in a row and is around 106, with 105 as a support level from the start of 2015. The five year note has 178 to 185 as major resistance since the high first hit after the taper tantrum, and early today the lower end of that band was tested. Tens have resistance at 235 to 239 (per Gundlach and Fibonacci) and again, this area was tested early today. TYZ traded to 125-17, with maximum open interest in TYZ 125.5 and 125.0 puts (55k and 77k, expiry in one week). There’s a lot of wood to chop to get through these levels; longer time frame participants will likely use these areas as support. I would tend to ignore macro constructions at this stage; too many possible outcomes. There was an interesting Bloomberg article citing Paul Romer of the World bank today with this clip: In between, he offers a wicked parody of a modern [typical economist] macro argument: “Assume A, assume B, … blah blah blah … and so we have proven that P is true.” Well, we’re in the blah, blah, blah period right now, and I have no idea what P is going to be.
–What I do know is that there were a few large trades yesterday that bolster the steepening case. A new buyer of 70k FVF 119/120 call spreads for 15 (settled 14 ref 118-12.25), and a program buyer of USF 152 puts (near 50 delta) in size of about 15k. A couple of the near one-year euro$ calendar spreads pushed to new highs; the peak one year moved forward to March’17/March’18 at 42 bps. However, the market is taking the Fed at its word in terms of a slow trajectory of hikes. For example, Feb/April FF rose 1 bp but still only prices around 16% odds of a hike in March.
–Leading Indicators today expected +0.1.
