Yellen sellin’
January 19, 2021
–Once again worth noting the large seller of EDU’23 9950 calls which has smothered back month eurodollar vol and spilled slightly over into treasuries. On Friday another 40k were sold at 17.5, bringing the total to ~115k. Settled 18.0 vs 9947.5. Yesterday’s holiday activity appeared muted. Tens ended Friday at 1.095% ref TYH1 136-275. Futures currently 136-23 with stock index futures rallying into the start of earnings season.
–Today Yellen appears before the Senate to sell the new administration’s stimulus package. From the relatively friendly seat at the Fed to a more charged environment. The challenges will become greater in Q2 as official inflation figures are expected to firm significantly due to baseline effects. Price increases across commodity markets are plainly visible. The FT is leading with this headline: “Tripling of China-Europe shipping costs threatens goods supply”. On the other hand, Lacy Hunt’s Hoisington Review maintains a bullish stance on treasuries. “When debt capital, like any other factor of production, is overused its marginal revenue product declines. This serves as a persistent drag on economic activity that restrains growth despite the best efforts of monetary and fiscal policy.” In previous missives he cautioned that overt Fed monetization of huge federal deficits would cause him to re-evaluate his call for ever lower yields. That warning was absent this time.
–Is inflation dependent on growth? I think not. It’s more of a sentiment change: Hoarding, (and paying more) to ensure supplies that were previously taken for granted. The last link in the supply chain has seen prices compress as displaced workers were forced into the food and consumer goods delivery gig by Covid. The links in front of final delivery are likely getting stickier. We’re moving into a different regulatory environment, and, (I’ll provide the warning that Hunt omitted) a central bank that has abandoned inflation concerns and elevated labor disparity as a top policy objective, while monetizing debt.
