Steady as she goes
Dec 12, 2019
–As expected the Fed left rates unchanged. The dot plot indicates gently rising FF over the next few years; not a single dot is lower than the current 1.50-1.75% target over the next three years. In Q4 of last year, the Fed also perceived policy to be on auto-pilot, with balance sheet tapering quietly running in the background against a bias for an increased FF target. The stock market intervened and forced a response. The current stance projects a growing balance sheet (running in the background) and a stable FF target with a continued forceful hammer to nail down repo funding costs. So, the question is, what outside market is going to upset the apple cart? From past experience we know that rapid adjustments in stocks to the downside elicit a knee-jerk answer by the Fed; therefore call structures targeting lower rates are still prevalent in euro$’s. We know from fx volatility levels near historic lows that for NOW, the value of the dollar is not a big risk. The perception of longer term US rates is similar, that potential increases will be smothered in an environment of low inflation and tepid global growth. On this last point, I’m not so sure. The Fed is welcoming the idea of an inflation overshoot and is shoveling coal as fast as possible to keep funding costs low and stable. Keep an eye on the caboose.
–Yields eased with reds thru golds up 4..0 to 4.5 on the dollar curve. Tens fell 5 bps to 1.784%. Today we have PPI expected 0.2 with Core yoy 1.6%. Thirty year auction. UK vote.
–A couple of trade notes from yesterday: buyer of EDZ0/EDZ1 calendar at -2.0 appear to be an exit of about 15k. Settled -3.0. An opposite trade occurred in options, not particularly large but interesting: buyer of EDH1 9900c for 10 with a delta hedge in EDZ0 at 9841.5. The calls settled 10.5 while EDZ0 settled 44.5. Sort of a synthetic sale of EDZ0/EDH1 which closed -0.5 bp at -7.0. Once again, this points up relative weakness in EDZ0. EDM0/U0 is -7.0. EDU0/Z0 is -0.5 and Z0/H1 is -7.0.
