Home Forums Main Forum 2016 News Takeaways [DISCONTINUED]

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  • Curve Advisor
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    #3173 |

    I thought I would start a new thread where I post some of the more interesting news takeaways from the CA newsletters. It will be a week delayed, but I will post a few of the better blurbs. I think the Forum is a better place to post this, than to start new blog posts.

  • Curve Advisor
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    Post count: 612

    [selected bullets from June 6, 2016]

    • That payroll was poor, but may not have been that terrible. Allegedly, the #1 most important piece of data for economists is the unemployment rate. And that dropped 0.3 to an eye-popping 4.7%. This was the Fed projection for December 2016, so there seems to be much more slack in the labor markets than previously expected. While it is obvious to me that the natural rate of unemployment is lower than previously thought, it’s possible some of the hawks could be saying, “we’re here! You would expect fewer jobs created when we get to the natural rate. [pat myself on back]”

    • You don’t want to get 4.7% with only 26K job growth and 458K people leaving the work force. According to the household survey, in the past two months we lost 290K jobs and 820K people left the labor force. And there were 59K in downward revisions to the establishment survey for previous months resulted in the three month payroll average being only 116K per month, with a noticeable downtrend since Feb: 233K, 186K, 123K, 38K. I’m really curious to see what the LMCI says Monday.

    • Brainard post-payrolls said “In this environment, prudent risk management implies there is a benefit to waiting for additional data to provide confidence that domestic activity has rebounded strongly and reassurance that near-term international events will not derail progress toward our goals.” I know she is THE dove right now, but she is not a crazy dove (like Kocherlakota). She has projected 1 hike this year, which is basically where the markets have been most of the year. That is not dovish – that is spot on. “Downside risks remain… In addition, because the depressed level of the neutral rate of interest reflects forces that are likely to persist, the appropriate path of policy is likely to remain shallow for several years.” Whenever I hear things like “policy will remain shallow for a few years,” that gives me the green light to do things like buy negative flies (and double flies) further out on dips (as long as recession doesn’t look likely).

  • Curve Advisor
    Keymaster
    Post count: 612

    [selected bullets from June 13, 2016]

    • The bears and flatteners from a few weeks ago obviously still had more puking to do. We are now 4bps from the three month highs in EDZ7. So now we are now pricing in only 1.33 hikes… not by the end of 2016, but by the end of 2017! That seems crazy low, considering how low the hurdle on a Fed hike seemed just a few weeks ago. The Fed may be recoiling and may want to wait for a few months more data, but they will want to hike at some point.

    • Soros came back into the markets and is super-bearish equities and the global economy. Common sense would say “if he’s coming back, that must mean the opportunity is that good!” I am not a believer, but I do think people could get spooked enough by the negative rhetoric and Brexit to want to jump on the bandwagon or at the very least sit on the sidelines. Vol has jumped a bit the past week. I like leaving room to get aggressive short rates around Brexit (probably after). The reason I’m not a believer is because of the Baby Boomer elephant. While everyone seems to think equities are high from a valuation perspective (myself included), it wouldn’t surprise me if the elephant pushes us to 2200 in the S&P.

    • Speaking of elephants, I’m not so sure any more the long end couldn’t keep rallying. With bunds near zero and JGBs below zero, and those economies still in need of stimulus, what are global investors supposed to buy? One of the major reasons to buy bonds is for the carry. Growth in the US is slow, and I’m not sure the Fed needs to hike past 1.50 – EVER. And I am a bear! So US fixed income is really attractive now, on a relative basis. I’ll discuss this further in a future post.

    • Brexit odds jumped. Last week, you got almost 3:1 on your money if you thought the UK would leave the EU. This week, after that ORB survey showing >50% probability (on their fishy weighted survey), it’s 2:1. The anti-Brexit folks would like this to be wider, but it’s not that close – especially now with the media hawking that it is close, people who may not have voted at all (thinking it wasn’t close) are more likely to show up to vote against.

  • Curve Advisor
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    [selected commentary from June 13, 2016]

    FOMC STATEMENT

    I don’t expect much from this FOMC statement. There’s really no need to do anything except to tweak the assessment of the economy – especially to take into account the weaker payroll. They already said “economic activity appears to have slowed” at the last statement. I’m not sure things are that different now. They are data-dependent.
    The main thing to look for is to see how many dots dropped to 1 hike (from 2 and 3 hikes). The median is especially useless now because it seems like half the people on the FOMC have no idea what they are supposed to be doing. I have no interest in seeing how many of the 3 and 4 dots fell to 2, because frankly, anyone who had 3 or 4 dots need to be ignored. I think it’s unlikely anyone drops to zero, but this is obviously possible. I stopped paying attention to the growth and inflation projections. But it should be interesting to see if people did indeed adjust their “longer run” unemployment rate, as I think they should have after printing 4.7% after that weak payroll last month.

    A “think tank” apparently thinks we get a dovish statement next week. The Fed will acknowledge the weak NFP and back away from 2 hikes this year. You don’t say. I said last week that the hurdle for July was high – especially if you believe in the two step hike. At this point, I would think the Fed would want to see at least 3 pretty decent payrolls before a hike is realistically back on the table. So September is possible (the markets think 5.0bps). But July at 4.7bps seems high, relative to September and December. I suppose this could be a trade. I’m going to mull this over next week, but probably won’t do anything because losing 20+ to make less than 5 doesn’t excite me, and I see no great direct options play.

  • Curve Advisor
    Keymaster
    Post count: 612

    [selected bullets from June 20, 2016]

    • The Brexit probability dipped a little more, and is currently around 30% (Sunday mid-day). On balance, the polls apparently came out in favor of “remain.” And people are adding about 5-6% for remain because that’s what happened between the polls and voting with Quebec and Scotland, in their “leave” campaigns.

    • Random Brexit thought: Is there a market size manipulation play between the polls/bookies and the markets? In other words, if you were a large fund with a slightly crooked moral compass, could you spend say $25 million to manipulate the polls and/or the betting lines to make $250 million in the markets? Because the former markets are not anywhere near as deep as say the GBP market. But we seem to be paying an awful lot of attention to them. Whenever the smaller market drives the larger markets, you need to be a little wary.

    • BULL-ard identified himself as the low dots. When I saw those low dots, I said to myself, “that couldn’t possibly be Brainard, could it?” And as I went through the list possibilities, I thought, “surely not the uber-hawk Bullard! – the same guy who was calling for three 2016 hikes not too long ago? That would make him look like the biggest flip-flop-flip-flop-flip-flopping idiot. Nooo…” Yep. Idiocy confirmed.

    • The Fed Funds effective fixed at 0.38 on 6/16. This is only 1bp higher than normal, but this is the first time in three months we have fixed at anything other than 0.37, except on month-ends. It’s probably nothing, but keep a watch on it.

    • Lost on all the FOMC and Brexit headlines was that the US data is looking slightly better. Retail Sales were slightly firm, and so was CPI. Industrial Production was weak, but it is noisy. So GDPNow is a very healthy 2.8% and Nowcast dipped a little to 2+% for both Q2 and Q3. But in my opinion, 2+% for the rest of the year is good, and should set us up for a Dec rate hike.

    • Pet Peeve: Why do people put out analysis that shows 2s-10s flattening as a sign of recession? It can signal a recession. But the flattening is more about the current environment and the global demand for long rates and the “new normal.” Speaking of which, that is the topic of discussion for today.

  • Curve Advisor
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    Post count: 612

    [selected commentary from June 20, 2016. I had to post this because as of now, my over/under was spot on.]

    As you know, I think the Brexit damage stories are overstated. My over/under on how long it takes the markets to stabilize after the Brexit announcement is 2.5 days. This is just a wild-assed guess. The (low-probability) upside tail on the number of days is obviously very high though, but that was an over/under and not a mean. I suppose the bigger concern is that other countries leave, so in that respect, we could keep getting more headlines. But what headlines are we talking about? Haggis tariffs? It’s just a break-up where they will remain friends. It’s not harakiri. Wait until you think the markets have stabilized (may be days), but I will be looking at Dec and 2017 hikes – perhaps buying FF in the front end of any spread. I will also be looking for pretty much everything else on the “no Brexit” list that makes sense at better levels, when the markets stabilize.

  • Curve Advisor
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    Post count: 612

    [selected bullets from June 27, 2016]

    • In retrospect, letting a “majority vote” decide something that can take years to get into or out of seems unbelievably dumb. And now there are 2 million signatures on a petition for a Bremain referendum. Round 2 anyone? The 60-40 rule is one of the few things the US Senate may be doing right. Or at least a 55-45, or something that shows a reasonable majority. Otherwise, it’s just a coinflip on what mood you find people in that day.

    • There may be some UK credit issues. Moody’s cut their credit outlook to “negative.” And other similar outcomes may occur – not just for the UK, but for companies in the UK.

    • The clock is now ticking on Frexit, Itexit, Spexit, Scotexit, etc. I don’t see this as being an additional problem though. Either: (1) Brexit will end up okay and those other exits will be considered less additive, or (2) Brexit will blow up the UK and no one else will want to leave. I obviously vote for the former.

    • Random thought: I wonder if the “older” Leave spite-voters cashed out their retirement savings before the Brexit vote count. From the looks of the FTSE leading up to the count, it doesn’t look like it. I can hear the collective “Yes! [during vote count]… No!!! [upon seeing market reaction].” Karma.

    • In the meantime, the US economy is chugging along. GDPNow and Nowcast are basically unchanged on the week. It’ll be interesting if Brexit has an effect on the US economy. The main transmission mechanism will be equity levels.

  • Curve Advisor
    Keymaster
    Post count: 612

    [bullets from July 4, 2016]

    Holy blind squirrel getting a nut! My over/under on how many days until we get over Brexit was right on the money! Here are my takeaways from the past week:

    • When I watch the UK news now, I feel like I’m watching Monty Python. Your peers told you to scram in a confidence vote and you refuse to leave? You voted “leave” because you didn’t think you could win? The right-hand man wants to be the new jefe, and the former presumed jefe leaves the race for prime minister. The North does not want to follow you. So people realize now that the politicians were lying? “Nobody expects the Spanish Inquisition!”

    • In the meantime, the US economy is chugging along. GDPNow and Nowcast are basically unchanged on the week, with the Nowcast 3Q GDP having nudged up to 2.2%. Of course, it is impossible for these models to predict what a weaker UK and EU economy will mean for the US going forward. The UK will obviously be most affected, but most shops think the US will only be affected a few tenths of a percent (if that). I realize there is a tail to this GDP estimate, but less than 10% chance of a hike in December seems harsh if all we are talking about is a tenth or two reduction in GDP. If I recall, Brexit was also a less than 10% probability.

    • When I look at the WSJ chart, it’s interesting to note that the huge downward acceleration in GDP for the UK and EU doesn’t occur until next year. Call me a simpleton for thinking it’s in both parties’ interests for this to be a cordial and quick divorce. You still need each other! But I could see how the Flying Circus could start drawing battle lines: the EU wants to set an example for future countries wanting to leave, the new UK leadership probably wants to try and make a name for themselves by hammering out a “great” deal, and we have negotiations go on until the eleventh hour. This could be depressing for European citizens and businesses for the next few years. If a split must happen, leaders should be responsible “parents” who divorce quickly and amicably – for the “kids.”

    • Morgan Stanley thinks there is a 40% chance of a global recession in the next 12 months. Maybe. But as you can see from the WSJ chart, the US is supposed to be relatively unscathed. I’m not saying a recession couldn’t happen. I’m just not sure it should be a given.

    • Just think of all the new rounds of QE coming. The UK and EU are both likely to engage in some sort of policy stimulus. Japan is not on the WSJ chart, but you can be sure they will join the party and do whatever they can to manipulate their currency. Umm … I mean “engage in simulative monetary policy.”

    • The 6mo libor fix went over year-end last week. We had some Brexit noise, but there did not seem to be any noticeable increase for the year-end turn. Traders had other things on their mind. With rates going lower, the turn may not show up noticeably for a while (if at all).

    • Fischer was on CNBC Friday and he seemed fairly relaxed, and not overly preoccupied with Brexit. Fischer is the SECOND most important person on the FOMC. Fischer said the U.S. data has “done pretty well” since May’s disappointing jobs report. He said those figures are more important for the U.S. outlook than a Brexit. He also made it seem like negative rates are unlikely. “One of the things you learn if you’re a central banker is never say never, but if there’s one thing we don’t want to do, we have no plans to move into negative territory and we will try to avoid ever getting to that position.” This limits the “inversion potential” of the curve in the whites. They have the 1 ease (maybe 1.5), and that is it.

    • Powell said Tuesday that Brexit has shifted global risks to the downside, but this was before equities recovered. It is unclear where he stands now. He is another important “neutral” voice.

    • On the week, greens led a 13.5bp rally. But watch for golds (and beyond) to lead future rallies. If you think the five year treasury at 0.99% is a good buy (I don’t), the thirty year at 2.23% must seem crazy good in this yield-grab environment.

    • We get plenty of juicy data next week. Some people are going to say that Brexit overshadows all of that, since the data is pre-Brexit. But it’s not clear to me that things couldn’t pick up in the US after Brexit. If the UK and EU aren’t trading with each other, surely there will be opportunities to fill the void for some enterprising Americans? There are many companies that can benefit from Brexit: consulting firms, relocation firms, etc. And a lot of money to be spent on expanding offices and plants in the EU. If the UK and EU can’t agree on trade, I’m sure there are plenty of American companies that would be more than happy to fill in. And once Brexit becomes announced, companies that may have been holding off on expansion will have the green light to move ahead. I’m not saying there aren’t downsides to the US from Brexit, but there are some positives too. And on that patriotic note, enjoy your 4th of July.

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  • Curve Advisor
    Keymaster
    Post count: 612

    [selected bullets from July 10, 2016]

    Just wow! If you told me payrolls would come in at 287K, the S&P would make new highs and EDU6-U7 spread would be 11, I would have said you were crazy. Yet here we are. I discuss the current situation in the next section. Here are my takeaways from the past week:

    • June payrolls erased the bad taste from the May payrolls. We are now back to having the narrative be a “constructive” employment growth trend. Even though this is only one data print, the current dovish tone will start to change over time. I can’t wait for Jimmy B’s next Fed speech! A 147K Q2 payroll average is reasonable, and this continued pace for the rest of the year should see the Fed more comfortable with a hike in December (assuming no other issues).

    • In the meantime, the US economy is chugging along. GDPNow and Nowcast are basically unchanged on the week, with GDPNow nudging down to 2.4% and the Nowcast 3Q GDP having nudged up to 2.3%.

    • Fed Effectives seems to have stabilized. From a high of 41 bps two weeks ago, we have been at 40bps last week, and the markets and I expect this to fall to around 38 later in the month.

    • The libor rate is still drifting higher. This could drift a little higher, but the markets and I expect this to stabilize in a week or two.

    • I thought it was interesting that Jamie Dimon mentioned Brexit could be reversed. This may be “<10%” probability (especially since a second Brexit referendum was voted down), but we’ve seen how those kinds of odds can play out. FWIW, I think it’s > 10% – especially since the “extra cash” and “no immigrants” promises from the Brexit campaigners may not come to pass. Most Parliament members are apparently not for Brexit and I think a majority of people are now anti-Brexit. But let’s just call the odds “10%.” Shouldn’t the markets have to price in a 10% chance of a 25+bp selloff on no-Brexit? That tail should be larger – see “Value on the Horizon.”

    • Dudley said that the Fed can afford to be a little more patient and wait to assess developments, in light of Brexit and low inflation. He also said, “If there are broad contagions in financial markets, and if it leads to greater questions about the stability of the European Union, then it would have more severe consequences.” You don’t say. Tarullo said there is no need to raise U.S. interest rates until there is convincing evidence inflation is moving towards the Fed’s target on a sustained basis. But both of these comments were pre-payrolls, and they have to feel a little better about the US economy post-payrolls (even though it was pre-Brexit). The post-Brexit data in the coming months will be interesting.

  • Curve Advisor
    Keymaster
    Post count: 612

    [selected bullets from July 17, 2016]

    • Bullard, Kaplan, Lockhart, Kaplan and Kashkari all seemed more “cautious.” Harker and Williams were less so. Mester and George were close to their usual hawkish selves. The hurdle for a Sept meeting is extremely high, but a lot of things can happen in two months. We’ve seen FOMC members flip on less than 1 month of data, so two months could be an eternity.

    • Fed Effectives have stabilized at 40, but they don’t seem to be headed back down. FFQ was down a bp on Friday, so the market also seems to have given up on the FF effectives moving lower.

    • The libor rate is still drifting higher. It’s a combination of the September Fed meeting being priced back in and the libor-FF spread drifting slowly out the past couple of weeks. I’m still not sure if this is a libor “problem” or just everyone getting into the same spread-widening position. I just don’t see much corroboration in any other market of financial stress – equities, vol, banks, BBB spreads, etc. I can’t imagine ED-FF is the cheapest way to express a credit blow-up view, but I don’t think it’s worth fading.

  • Curve Advisor
    Keymaster
    Post count: 612

    [selected bullets from July 24, 2016]

    • The libor rate is still drifting higher. The 3mo libor fixing widened 3.3bps last week, and EDU6 right now is pricing in about 6.5 bps MORE bps of just libor-FF spread widening (not including meeting difference between the libor fixing and EDU6). This seems like a lot in an environment where there does not seem to be a lot of credit or market stress priced in. I have no idea how much further libor is going to widen (if at all). But it seems to me that EDs could rally 10bps if the ED-FF spread comes back to the levels from last month. I discuss this in the next section.

    • Brexit is going to last a looong time. May said the UK won’t trigger Article 50 this year, and Merkel won’t start talks without it. Holy foot dragging, Batman! Given the Brexit vote, I can’t decide if this is good or bad for the UK/EU economies. On the one hand, the uncertainty is bad for business. But on the other hand, we have the status quo for longer and possibly increases the chance that Brexit may not happen (in its intended form).

    • Next week is the Fed meeting. They are obviously not going to do anything. While the economic assessment will be more upbeat, I don’t think they can even begin to signal a future change in policy stance. I am undecided if it is worthwhile doing something with the September meeting pricing. The levels aren’t attractive enough to do anything now – but the markets may want to go into the Fed meeting short.

  • Curve Advisor
    Keymaster
    Post count: 612

    [selected bullets from July 31, 2016]

    I did not realize we were in a recession. We’re not, but the markets sure are acting like it. Here are my takeaways from the past week:

    • I apparently jinxed the US by saying “the US economy continues to chug along.” I’m a little surprised the Q2 GDP came in so much lower (at 1.2%) than the final GDPNow estimate of 1.8% and Nowcast estimate of 2.1%. Consumption surprised on the upside but business investment was low again and inventories declined noticeably. I suppose you can spin the details in both the positive (the consumer is strong, inventories are lean, etc.) or negative (business investment has consistently been low, OMG! 1.2%!) perspectives. But my two main thoughts are: (1) I think this early GDP estimate will get revised higher (closer to 1.8-2.1%), and (2) where we were 1-4 months ago is not particularly relevant…

    • Next week, we start getting post-Brexit data. This is what we have been waiting for. The markets seem to be expecting a drop-off in data based on the price action Friday. I have no idea – I’m not an economic number cruncher. But I generally lean towards being in the “status quo” camp, unless I have reason to think otherwise. Call me Mr. Belly (of probability distribution).

    • The libor rate is still drifting higher. The 3mo libor fixing widened 3.8bps last week, but this time EDU6 rallied 2bps on the week. I currently see EDU6-FF spreads being about 36.5bps. Since this is within a bp of where the current libor-FF spread is, we are seeing a stabilization / narrowing in future libor-FF spreads. There is almost NO further libor-FF widening priced in EDU6. Just a month ago, this spread was around 28bps. Six months ago, the comparable ED1-FF spread was 21bps and nine months ago the spread was 13bps. I’m not saying that we’re headed to 13bps, but any of these are a long way away from 36.5bps in a yield grab environment. I discuss some implications in the next section.

    • The Fed meeting was a yawner. They are going to be data dependent and patient. There is no reason to think they do anything soon – especially not after two quarters of GDP that averaged 1.0%. So the 3bps priced into the Sept meeting seems high, but just like last week, this is not something I want to go nuts fading. I suppose two payrolls before the next meeting is a lot and anything can happen. I just think when we have two quarters of weak-ish data, you probably want to re-establish more of a longer trend before tapping on the brakes.

    • Williams and Kaplan sounded optimistic. They both downplayed Q2 GDP. Williams even said the Fed could possibly hike two more times this year (LOL) – or zero or one. I believe he effectively covered 99% of the possible range. Thank you for that keen insight. They are data-dependent, and we get important data next week.

    • In all the Brexit hoopla, I missed that the Fed released their 2017 calendar last month. I was looking for this in May, and the slackers finally came out with it over a month later. The biggest change was that the former late Jan and late April meetings from 2016 were moved back a week to Feb 1 and May 3. This helps our FFF-G and FFJ-K spreads a little, as the number of meetings contained in those spreads increased fractionally. Also, as an added bonus to ED options traders, the M7 and Z7 options both settle AFTER the FOMC meetings. Let’s keep these on the radar for next year.

    • On the week, golds led a 15bp rally. The long end of the curve continues to rally. This is what we have been saying for a while – that there will be high demand for the long end of the yield curve (the elephant, overseas QE, technicals, etc). And combine this with the prodigal whites and reds rallying back (after having blown out allegedly because of the new Treasury rules) makes the curve look like a full-blown economic slowdown rally…

  • Curve Advisor
    Keymaster
    Post count: 612

    [selected bullets from August 8, 2016]

    Obviously, having the first five meetings in 2017 go for a total of 3.5 bps was truly idiotic. Here are my takeaways from the past week:

    • Payrolls! The US economy is indeed chugging along. Everything was solid – payrolls, participation, average hourly earnings and average workweek. The unemployment rate was “unchanged” but was fractionally lower. U6 upticked 0.1 to 9.7%, but was a function of increased participation.

    • The US economy is back on track, with GDPNow projecting a 3.8% Q3 GDP and Nowcast calling for 2.6%. We don’t have much Q3 data to go on so GDPNow may drift lower, but another month of good data and people will have forgotten about the 1% Q1 and Q2.

    • Dudley said last week that the market is underestimating the potential for rate hikes. “If the upcoming information validates my view of the outlook, then U.S. monetary policy will need to move at a faster pace than implied by futures prices to a more neutral posture as the labor market tightens further and U.S. inflation rises.” I’m pretty sure his outlook did not involve a 255K payroll. He also added that the market didn’t appear to be giving much weight to the possibility that the economy could grow faster than expected. And this is the topic for the week. If Dudley (a regular dove) is bearish, then so am I. Neutral is at least 2-3 hikes away.

    • The libor rate is still drifting higher. The 3mo libor fixing widened another 3.3bps last week. EDU6 sold off 7.5bps on the week, so there is more libor widening priced. Something does not smell right here. I can’t believe the 3mo libor fixing is near 80bps in this low-yield environment. How can people be tripping over themselves to own 2yr treasuries at 72bps, when they can earn over 79bps for 3 months in the libor market, at a time where 5 year swap spreads are near-zero and GBP libor is noticeably decreasing?!? One day, we are going to look back and say, “what was the market thinking?!?” And don’t be surprised if there is another libor probe.

    • On the week, golds led a 13.7bp sell-off. Strangely, we haven’t had much of a curvature move. Assuming ED-FF remains stable in the reds, I would think the flies around the reds should start to show more shape on a further down-move.

  • Curve Advisor
    Keymaster
    Post count: 612

    [selected bullets from August 15, 2016]

    • Retail sales was surprising. I thought after all the antiquated-format “old school” retailers performed better (Macy’s, JCPenny, Kohl’s, etc) on Thursday, we may see continued strength. But alas, this was not to be. Retail Sales is a noisy number and we had a good run in consumer data prior to the July data. It’s hard to make much of one data point, so we await more information.

    • The GDP indicators apparently don’t weight Retail Sales that high. GDPNow and Nowcast both nudged down only 0.2, to 3.5% and 2.4% respectively for Q3.

    • Powell said that with inflation below target, the Fed can be patient on raising rates. What I found interesting was that Powell said he needed to see two really strong employment reports to put September into play (this was before the last payroll). So Powell just needs one more good payroll. You never know.

    • The libor rate widened 2.6bps on the week, but has been somewhat stable the past 3 days. This resulted in ED4-FF spread being almost 3bps narrower on the week. I think the worst may be over. Commercial paper rates seem to be normalizing, C.P. volumes are lower, and I suspect some of this month’s large debt issuance may be short-term finance-related. But libor could be volatile for the next two months.

    • It seems to me that if libor is high, a hike is less likely to be priced (all other things being equal). With libor at 81.8bps, it’s effectively like a Fed hike has already happened. If the Fed had hiked to 50-75bps, then libor under normal conditions may have been around 80-90bps. Libor at these levels (or higher) should make the Fed less likely to raise rates (since financial conditions are arguably tighter), BUT a compression in libor-FF (that I expect later in the year) could increase the likelihood the Fed needs to hike. This is just a minor consideration in the hike calculus, but one worth keeping in mind.

    • The interesting thing with the above libor dynamic is that this could cause EDU and EDZ to stay more pinned (all other things being equal). I’m not saying we couldn’t break out (if say, an ease was priced or libor really blows out). But lower libor implying more hike and vice versa may balance could keep the first two contracts closer to home on the margin. I had been putzing around with selling vol on EDV thru EDZ for months now, but I just don’t have a strong enough view.

    • On the week, golds led a 9.9bp rally. This is not surprising with low Retail Sales, low Productivity, low PPI, and weaker China data. Reds-Golds pack spread is at five year lows. This again is not surprising. As I’ve said for a while, the long end should be flatter in this yield-grab environment.

    • Retail sales was surprising. I thought after all the antiquated-format “old school” retailers performed better (Macy’s, JCPenny, Kohl’s, etc) on Thursday, we may see continued strength. But alas, this was not to be. Retail Sales is a noisy number and we had a good run in consumer data prior to the July data. It’s hard to make much of one data point, so we await more information.

    • The GDP indicators apparently don’t weight Retail Sales that high. GDPNow and Nowcast both nudged down only 0.2, to 3.5% and 2.4% respectively for Q3.

    • Powell said that with inflation below target, the Fed can be patient on raising rates. What I found interesting was that Powell said he needed to see two really strong employment reports to put September into play (this was before the last payroll). So Powell just needs one more good payroll. You never know.

    • The libor rate widened 2.6bps on the week, but has been somewhat stable the past 3 days. This resulted in ED4-FF spread being almost 3bps narrower on the week. I think the worst may be over. Commercial paper rates seem to be normalizing, C.P. volumes are lower, and I suspect some of this month’s large debt issuance may be short-term finance-related. But libor could be volatile for the next two months.

    • It seems to me that if libor is high, a hike is less likely to be priced (all other things being equal). With libor at 81.8bps, it’s effectively like a Fed hike has already happened. If the Fed had hiked to 50-75bps, then libor under normal conditions may have been around 80-90bps. Libor at these levels (or higher) should make the Fed less likely to raise rates (since financial conditions are arguably tighter), BUT a compression in libor-FF (that I expect later in the year) could increase the likelihood the Fed needs to hike. This is just a minor consideration in the hike calculus, but one worth keeping in mind.

    • The interesting thing with the above libor dynamic is that this could cause EDU and EDZ to stay more pinned (all other things being equal). I’m not saying we couldn’t break out (if say, an ease was priced or libor really blows out). But lower libor implying more hike and vice versa may balance could keep the first two contracts closer to home on the margin. I had been putzing around with selling vol on EDV thru EDZ for months now, but I just don’t have a strong enough view.

    • On the week, golds led a 9.9bp rally. This is not surprising with low Retail Sales, low Productivity, low PPI, and weaker China data. Reds-Golds pack spread is at five year lows. This again is not surprising. As I’ve said for a while, the long end should be flatter in this yield-grab environment.

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    [selected bullets from August 21, 2016]

    My Spidey sense says we could get a large move in rates coming in the next few weeks – Jackson Hole, payrolls, and people coming back from summer. Here are my takeaways from the past week:

    • The US economy keeps chugging along. You knew it was coming! GDPNow nudged up 0.1 to 3.6% and Nowcast nudged up 0.6, to 3.0% for Q3.

    • Dudley said a September hike is possible and the markets are too complacent. This is not surprising when “his” Nowcast just popped 0.6% on the week. “For the first time in quite a while, gains in middle-wage jobs actually outnumber gains in higher- and lower-wage jobs nationwide.” “I believe this is an important development in the economy, because, if it were to continue, it would create more opportunities for workers and their families who have been struggling up to now.”

    • Lockhart and Williams also suggested at least one rate hike was possible in 2016. Kaplan was more dovish, saying the FOMC should proceed in a “gradual and patient” manner. Williams’ short end hawkishness was balanced by his long end “dovishness” – he wrote a short paper titled “Monetary Policy in a Low R-Star World.”

    The chart below (“Estimated inflation-adjusted natural rates of interest”) shows how the real natural/neutral rate of interest has declined in recent decades. He thinks the real neutral rate in the US is around 0.5% (aka 2.5% nominal rate). Considering the ten year yield is at 1.58%, I suppose this isn’t real news, but it made the news and I liked the chart (see later section). The Fedspeak last week has reinforced my long-standing thesis that we could get early hikes and that the hiking cycle will be shorter than in the past.

    • Yellen will probably sound upbeat on the economy next week. I would be shocked if she didn’t imply: (1) all meetings are live and (2) data-dependence, as she always does. The (very small) tail risk is probably that she sounds hawkish – because if she was going to say that some of the “impossible” meetings earlier this year were “live,” she may say more than that after two very good payrolls and a “complacent” market. I think this is probably the market perception and on the margin the bulls may be in hiding until after the Jackson Hole symposium.

    • The libor rate DECLINED 0.1bps on the week. ED4-FF spread was unchanged on the week. Interestingly, ED1-FF spread shows a 3.8bps of widening, while ED4-FF spread shows 1.7bps of narrowing from the current libor-FF spread.

    • On the week, blues led a 7.5bp selloff. The curvature move was led by the back greens and front blues, but another week of this, and I’d be an aggressive seller of those flies vs buying curvature in the reds (or steepeners). On a flat fly curve, and on the back of good data, I’ll take the earlier curvature over later curvature, with a short Fed hiking cycle. Stay tuned.

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    [bullets from August 28, 2016]

    We made new post-Brexit lows in EDs. While we could see further downside in the short term (especially if the gamma signal comes through), in the big picture we are still in a low R* world and yield-grab environment. Here are my takeaways from the past week:

    • Yellen said “the case for an increase in the federal funds rate has strengthened in recent months.” You don’t say. Apparently from the price action after her speech, when you keep saying every meeting is “live,” the markets start ignoring you. Fortunately, we had a translator:

    • Fischer said that that Yellen’s comments were consistent with a Fed that could hike rates in September, as well as a second time this year. I thought it was interesting Fischer chose to give an interpretation of Yellen’s comments, rather than project his own view (as most people do). In any event, the Fed is still data-dependent, and we have a lot of important data next week.

    • Yellen sounded happy with her tools. She highlighted QE and forward guidance as effective tools. All other things being equal, this will put downward pressure on the flies centered in the greens and the blues. At some point, if the Fed stops reinvestment of the portfolio, I could see these flies going positive. But it didn’t sound like reinvestments would stop any time soon, even though I personally think they should think about relieving some pressure off the long end.

    • The US economy keeps chugging along. GDPNow and Nowcast both nudged down 0.2, to 3.4% and 2.8% for Q3.

    • The 3mo libor rate increased 1.6bps on the week. But considering FFV sold off 5bps on the week, libor is coming in relative to FFs. The increase in libor is smaller than what you would have expected from the front-end selloff.

    • On the week, greens led an 8.5bp selloff. The curvature move was spread out over the flies centered in the reds thru blues. As mentioned last week, I like being an aggressive seller of the back flies vs buying curvature in the reds (or front steepeners). I am looking at some new trades for early next week.

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    [bullets from September 4, 2016]

    • Payrolls were actually decent… if you factor in that August tends to print low and gets revised higher. Unfortunately, the rest of the report was very mediocre. I’m not sure this is going to be convincing enough to get the Fed to hike.

    • The US economy keeps chugging along. GDPNow nudged up 0.1 to 3.5%, and Nowcast is unchanged for 2.8% for Q3.

    • The Fedspeak was more mixed going into payrolls. Kashkari and Evans were dovish, Rosengren was neutral-hawkish and Mester and Lacker were hawkish. I don’t want to spend a lot of time dissecting the speeches, since they were before the slightly soft payrolls. It’ll be interesting to see if any of next week’s Fedspeak sounds a little different.

    • The 3mo libor rate was essentially unchanged (increased 0.2bps) on the week. Apparently, a lot of commercial paper is set to mature before October 14 and may need to be rolled over, so IF we get any market stress, we could start seeing signs later this month.

    • On the week, blues led a 6.5bp rally. Curvature had a really interesting move last week. Typically, the flies go lower on a rally (gross generalization), and most the flies centered between the reds and mid golds did. However, the first 6mo fly (U6-H7-U7) was UP 3.25bps on the week! Part of this was EDU6-FF coming in 1.5bps. But it’s basically the front meetings holding firm (EDU6-H7spread), while the rest of the curve flattened. While I have been saying I like owning the front flies because of the shorter hiking cycle, 6 months is much shorter than what I had in mind. But it’s just one week, and part of it was EDU-FF, so I’m not going to make much of it.

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    [bullets from September 11, 2016]

    9/11 – the other day that will live in infamy. I can’t believe it’s been 15 years already. Never forget. Here are my takeaways from the past week:

    • Holy risk-off, Batman! This made sense considering the ECB was not as dovish as expected. One would have expected bears to have stepped aside for the ECB and pop in afterwards, and so when the bullish speculators got stopped out, that was a double-whammy.

    • The other shoe to drop would be if the BOJ’s “comprehensive assessment” results in less dovish policy. Not very likely tho – when was the last time an old Asian man admitted he was wrong? Eh hem. I’m not holding my breath. But Sept 21 should be doubly interesting with the BOJ and the FOMC.

    • This won’t be a “full” taper tantrum. Fixed income could certainly sell off more from here. Some of the year spreads are still very low. We haven’t sold off that much – it just feels like it because we’ve been in an absurdly tight range for so long. But the reason why I don’t think this will end up being a “full-fledged taper tantrum II”(100+bps) is because central banks are still looking to buy. My wild-assed guess is that we get a quarter of a “full” tantrum tops. The ECB and BOJ were running out of assets to buy. The markets did them a favor by making additional securities available. Props to Draghi if his “surprisingly” non-dovish statement was a premediated attempt to create more securities to buy while preventing a speculative bubble. The BOE is still buying and even the Fed is still reinvesting. That’s a lot of buying.

    • The S&P was down 2.5% Friday. I think most people (and at the Fed) would think a small correction could be a positive thing. Part of this drop was an “Oops. The central banks may not be expanding QE to equities. Where is the door?!?” But you always get a little nervous when there is a large equity move in September, the historically terrible month for stocks and everyone knows it.

    • The US economy keeps chugging along. GDPNow nudged down 0.2 to 3.3%, and Nowcast is unchanged for 2.8% for Q3. Retail sales next week is really important after those two weak ISMs.

    • Rosengren warned that “a failure to continue on the path of gradual removal of accommodation could shorten, rather than lengthen, the duration of this recovery.” The other two speakers last week were more dovish. Kaplan said that he still believes that data over the last several months have strengthened the case to raise interest rates, but the Fed can afford to be “patient and deliberate.” Tarullo said he wants to see more evidence of sustained inflation before considering an interest rate increase. But he added he can’t rule out a hike this year. Everyone is looking at Brainard’s speech on Monday. If she’s hawkish, then a hike is likely. But I would be totally shocked if she was.

    • The 3mo libor rate increased 1.7bps on the week. FFV was up 0.5bps. So we appear to be chopping around on the wider end of libor-FF. As previously mentioned, this will be choppy for the next month.

    • On the week, golds led a 5.8bp selloff. Curvature had another strange move last week. Typically, on a selloff, the flies go higher, but the flies around the reds were noticeably lower. I’m not sure what part of this was equities dropping. Monday could be a really interesting day for the curve.

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    [bullets from September 18, 2016]

    That was a strange curve-move week. We have two huge central bank meetings coming up next week (BOJ and Fed) that could cause more volatility. Volatility is opportunity. Here are my takeaways from the past week:

    • The data has been terrible this month. Payrolls, the ISMs, Retail Sales and Industrial Production have all been soft. So it should be no surprise that the Fed is not “expected” to hike next week. But as Yellen always says, she doesn’t look at just a month of data and there are a lot of restless hawks on the FOMC. Some inflation and income indicators have had an uptick, so this may add fuel to the dissent. That’s why even though it is very unlikely, I would consider the Sept meeting “live” – it might be the first time this year. See the next section for my FOMC thoughts.

    • The US economy keeps chugging along. However, the train seems to be slowing. GDPNow nudged down 0.3 to 3.0%, and Nowcast is unchanged for 2.8% for Q3. Nowcast’s initial projection for Q4 is only 1.7%. I’m guessing Dudley’s not going to be onboard for a premature hike, with his NY Fed calling for a 1.6% GDP for all of 2016.

    • Brainard warned that “the case to tighten policy preemptively is less compelling.” “Asymmetry in risk management in today’s new normal counsels prudence in the removal of policy accommodation.” Lockhart also implied there was little cost in being patient.

    • Not sure how the terrorism in Minnesota and New York over the weekend will affect the markets. Probably not much. But just in case, always have crisis protection.

    • The markets seem to think the BOJ will go more negative. This has steepened the curve in Japan and has taken the US with it. But unless they plan to cut back on QE, the curve will eventually flatten back out. Because when you make it difficult for people to hold cash, they will scramble to more positive yielding instruments. But as always, don’t be surprised if the BOJ does something unexpected. Banzai! Mmm… volatility.

    • The 3mo libor rate increased 0.5bps on the week. But that was a lot considering FFV rallied 2.5bps. The libor fixings bear watching the next month or so. EDU6 vs FF went out near the highs 41.7bps). EDV6 vs FF is 1.5bps lower.

    • On the week, whites led a 3.5bp rally. Golds were actually down 0.8bps, presumably in sympathy with Japan. The curve had bull steepened a lot more before Friday’s bear flattening.

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    [bullets from September 18, 2016]

    That was a strange curve-move week. We have two huge central bank meetings coming up next week (BOJ and Fed) that could cause more volatility. Volatility is opportunity. Here are my takeaways from the past week:

    • The data has been terrible this month. Payrolls, the ISMs, Retail Sales and Industrial Production have all been soft. So it should be no surprise that the Fed is not “expected” to hike next week. But as Yellen always says, she doesn’t look at just a month of data and there are a lot of restless hawks on the FOMC. Some inflation and income indicators have had an uptick, so this may add fuel to the dissent. That’s why even though it is very unlikely, I would consider the Sept meeting “live” – it might be the first time this year. See the next section for my FOMC thoughts.

    • The US economy keeps chugging along. However, the train seems to be slowing. GDPNow nudged down 0.3 to 3.0%, and Nowcast is unchanged for 2.8% for Q3. Nowcast’s initial projection for Q4 is only 1.7%. I’m guessing Dudley’s not going to be onboard for a premature hike, with his NY Fed calling for a 1.6% GDP for all of 2016.

    • Brainard warned that “the case to tighten policy preemptively is less compelling.” “Asymmetry in risk management in today’s new normal counsels prudence in the removal of policy accommodation.” Lockhart also implied there was little cost in being patient.

    • Not sure how the terrorism in Minnesota and New York over the weekend will affect the markets. Probably not much. But just in case, always have crisis protection.

    • The markets seem to think the BOJ will go more negative. This has steepened the curve in Japan and has taken the US with it. But unless they plan to cut back on QE, the curve will eventually flatten back out. Because when you make it difficult for people to hold cash, they will scramble to more positive yielding instruments. But as always, don’t be surprised if the BOJ does something unexpected. Banzai! Mmm… volatility.

    • The 3mo libor rate increased 0.5bps on the week. But that was a lot considering FFV rallied 2.5bps. The libor fixings bear watching the next month or so. EDU6 vs FF went out near the highs 41.7bps). EDV6 vs FF is 1.5bps lower.

    • On the week, whites led a 3.5bp rally. Golds were actually down 0.8bps, presumably in sympathy with Japan. The curve had bull steepened a lot more before Friday’s bear flattening.

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    [bullets from September 25, 2016]

    Hawkish Fed vs Weak Data. Who will win? Here are my takeaways from the past week:

    • The Fed said they will hike, assuming the data holds up. The natural question is, what qualifies as “further evidence of continued progress toward its objectives”? See the next section for further discussion of the Fed meeting.

    • Kaplan said the Fed can be patient in raising rates. Rosengren disagreed: “I am arguing for modest, gradual tightening now, out of concern that not doing so today will put the recovery’s duration and sustainability at greater risk, by generating the sorts of significant imbalances that historically have led to a recession.”

    • We have a full slate of Fed speakers next week – at least ten speakers, including Yellen. Yellen will actually speak twice, but neither is scheduled to be about the economy. While the Fed is data dependent, we may be able to glean some things from the speeches.

    • The US economy is chugging slowly now. GDPNow nudged down another 0.1 to 2.9%, and Nowcast is down 0.5 to 2.3% for Q3. Nowcast’s projection for Q4 also dropped 0.5 to 1.2%. The data continues to disappoint. It’s hard to say whether there is some seasonal issue involved, or if this is the start of something bigger. The Fed will not want to hike with a 1.2% GDP in Q4. But I have to remind myself that this “forward-looking” Nowcast Q4 projection is completely based on data from the past. So any current event, like better data or a “good” election, could change the expectations noticeably.

    • The 3mo libor rate decreased 0.5bps on the week. But that was not much considering FFV rallied 2.5bps. As mentioned in the intraweek email, there is a reasonable drop-off in libor-FF priced by the end of the year. I have no opinion on the next 3bp move in the spread – but eventually, it should go lower. Speaking of libor…

    • We should see how 3mo libor goes over year-end next week. The 3 mo libor fixing on Sept 29 should contain the year-end. We may get some information on the year-end turn.

    • On the week, golds led a 9.8bp rally. Whites were relatively unchanged at up 0.9bps. Friday’s settles were a little off, but it was mostly a straight-line move, taking back some of the steepening we saw for the BOJ meeting.

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    [bullets from October 2, 2016]

    The big headlines from last week were all about Deutsche Bank. In the next section, I discuss my thoughts on DB and take a historical look back at February, when we had the last bank scare. Here are my other takeaways from the past week:

    • OPEC seemed to have reached a tentative settlement deal. Now they negotiate how much everyone is going to tighten their belt. LOL – the haggling galore should be good for some laughs. They should have just gone with my crowdfunding idea – where only Saudi Arabia has to cut. Any oil deal is going to put some marginal upward pressure on inflation prints that were already starting to show some signs of life. It may also help investment, on the margin.

    • US Q2 GDP was revised up to 1.4%. I mentioned earlier in the year that you shouldn’t be too surprised if Q2 was revised up. But this is still underwhelming.

    • The US economy is looking very mediocre now. GDPNow nudged down another 0.5 to 2.4%, and Nowcast is down 0.1 to 2.1% for Q3. Nowcast’s projection for Q4 is still at 1.2%. But that narrative could change next week with all the important data.

    • Fedspeak nuggets. Fischer said the increase in wage inflation from 2 to 2.5% provides evidence of the connection between unemployment and inflation. “3% [wage inflation] is a rate that is consistent with a reasonable rate of inflation.” Kaplan said he would have been comfortable with a rate hike last month, even though he is “patient.” Harker identified himself as a “sooner, rather than later” guy. Kashkari leans dovish. It’s clear there is a range of opinions, but it seems only a few members are uncomfortable with a hike. It’s looking like a “strong signal” in Nov of a Dec hike is most likely (assuming the data holds up). I would not be so comfortable being long FFX from the current levels, even though it is unlikely.

    • 3mo libor went over year-end on Thursday and it increased 0.79 bps. Libor has had some noise recently – in particular falling 1.6bps the day before. So it’s hard to say what is going on. For now, this does not change the status quo for the year-end turn on the curve, which is about 1bp in Z turn for the next few years.

    • The 3mo libor rate increased 0.1bps on the week. You would expect 3mo libor to increase 1.9bps per week if the Dec meeting was fully priced (25bps) – all other things being equal. But the year-end hike is only 60% priced, we have the Treasury money rules, and we have European bank stress. So there is a lot of noise to decipher.

    • On the week, we were basically unchanged, with reds leading a 1.0bp rally. Golds sold off 0.3 bps, but that settle looked a little low. The week’s price action (what little there was) was all Deutsche-related…

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    [bullets from October 9, 2016]

    We are near what I would consider the “middle of the range” for EDs. I think we could be on the verge of a large move in rates. Unfortunately, I don’t have a lot of conviction in the direction because of all the crosscurrents. But this doesn’t mean I don’t have views… I discuss this in the next section. Here are my other takeaways from the past week:

    • Payrolls were constructive. Fischer called it a “Goldilocks” report. Not too hot. Not too cold. FFX fell 1.5bps on Friday, with some 99.59s trading. While I did say we needed over 200 for the Fed to hike in Nov, the Nov meeting is still “live” (but not “likely”)

    • Evans is okay with a hike this year – possibly in November. This was pre-payrolls. But when a dove like Evans says “if data continue to roll in as they have, I would be fine with increasing the funds rate once by the end of this year.” The move “would most likely be December” but “could be the earlier meeting.” He is an UBER-DOVE!!!

    • The US economy has stabilized at “mediocre.” GDPNow nudged down another 0.3 to 2.1%, but Nowcast edged up 0.1 for Q3 and Q4 to 2.2% and 1.3% respectively.

    • The OECD said that G20 inflation fell to 2.1% in August – that’s the lowest since 2009. There were large drops in China and India, which are some of the faster growing economies. Don’t be looking for higher neutral rates any time soon.

    • The pound was pounded. Surely I am not the only one thinking that this may not have been “accidental”? I’m not saying it is, but there are probably at least a dozen houses that could have intentionally caused this. Using some game theory, if you know the algos and the markets have certain stop or reversal strategies, it’s not unreasonable to use that to your advantage at a vulnerable time of the day. [Insert favorite Sun Tzu quote here]

    • Gold was pounded. I’m not a believer gold. But it seems clear some shops have mass liquidated. It will be interesting to see if there are other liquidations in other securities. Bill Gross apparently liquidated his long bonds in Europe. We are at that time where people start looking at year-end bonuses and taking time off for the holidays, after all.

    • Mester said “a few more rate hikes and the Fed can turn to balance sheet shrinkage.” Now that is a “taper” you should care about. But according to the markets, “a few” hikes is about 3 years away.

    • The Fed minutes next week could be interesting. I thought the September meeting had a number of subtle hawkish elements (considering they didn’t set a timeframe for a hike). It will be interesting if time frame was discussed at the meeting.

    • The 3mo libor rate increased 2.2bps on the week. Next week is the last week before the new Treasury money rules go into effect. Considering EDV6 settled 99.12 vs the 3 mo libor fixing of 0.87606 (translates to 99.124), the markets are expecting this to be quiet. I still think once the markets realize nothing terrible is going to happen, the risk is that it’s going to be a “release the hounds!” event on people wanting to lend at 3 mo rates that higher yields than a number of ten year government notes in the developed world.

    • On the week, we had a bear steepening with the golds leading a 13.3bp selloff. The curvature increase was distributed gradually over the entire curve. I suppose this is to be expected when the data did nothing.

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    [bullets from October 16, 2016]

    Welcome to the “game theory in the negative sum game that is futures trading” version of the CA. Read on to see what I mean. Here are my other takeaways from the past week:

    • Retail Sales were constructive. It was yet another “ho-hum” data week. But a bunch of “ho-hum” weeks and we could be well over 1% FF (3 more hikes) by the end of next year.

    • The US economy has stabilized at “mediocre.” GDPNow nudged down another 0.2 to 1.9%, but Nowcast edged up 0.1 for Q3 to 2.3% and more importantly Q4 moved up 0.3% to 1.6%. This projects lower than the Fed’s 2016 GDP projection in their last SEP. But it’s more than enough to get a year-end hike.

    • Fedspeak: I discuss Yellen’s speech in the next section. Dudley said he expects a rate hike this year and that every meeting is live. Evans wants to go slowly, but is okay with a December hike. He mentions the possibility of some dovish language after the hike (he is an uber-dove, after all). Harker favored a Sept rate hike. He favors a “sooner than later” approach but prefers waiting until Dec to hike because of election uncertainty.

    • The Fed Effective rate traded up to 41bps. I mentioned last week that it was suspicious that so much volume traded at 99.605. I have some articles on my web site related to the topic of “know your edge” in trading in a zero sum game. There are other participants in the market that see more of the daily flows, and will have a better idea of the fixing before we will. This is why I generally hate highly leveraged FF plays that some of you seem to like. Fortunately, I think enough 61s traded the past few weeks so that we can scratch any buys we had @ 60.5 and still eke out a microscopic profit. I think the risk is that the FF effectives drift lower, but as implied earlier, we will be the last to know.

    • The 3mo libor rate increased 0.8bps on the week. We are now in the new Treasury money rule environment. Let’s see if the world blows up. If we are still sitting here after a few days, we should try and buy ED whites (or calls) vs other structures. And interesting secondary way to play for ED-FF to narrow in the short term is to play for the term structure of ED-FF spread to be upward sloping again. Currently, ED-FF spread in the whites is higher than ED-FF in the reds. It is usually the other way around in a “normal” environment.

    • On the week, we had another steepening with the golds selling off 4.9bps while whites rallied 2.5 bps. It was a bull steepening on the fly curve, with the front flies going lower and some of the back flies going higher.

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    [bullets from October 23, 2016]

    Fun (meaningless) fact: Apparently the years ending in “7” have been “terrible.” The biggest one-day stock drop in Wall Street history happened in 1987. The Asian crisis was in 1997. The worst global meltdown since the Great Depression got started in 2007. Happy New Year – 2017! It’s a little early, but the Curve Advisor always looks several months ahead. See the next section. Here are my other takeaways from the past week:

    • CPI was a little “disappointing.” The headline number jumped to 1.5%, which is to be expected considering the pop in oil prices. But core is still a “ho-hum” 2.2%. It’s just more of the same…

    • The US economy has stabilized at “mediocre.” GDPNow nudged up 0.1 to 2.0%, but Nowcast edged down 0.1 for Q3 to 2.2% and more Q4 edged down 0.2% to 1.4%.

    • Fischer does not seem to favor running a high-pressure economy. “If you go below the full employment rate, or peoples’ estimates of full employment, by a couple of tenths of percentage points, I don’t think there’s any danger in that. But saying we should keep going until the inflation rate shows us we’re wrong, then you’re going to change too late.” Don’t ask this guy to be your high-pressure-economy wingman.

    • Don’t ask Williams either. He favored a Sept hike, see a hike this year and a “few” more next year. Dudley was more sanguine, seeing a rate hike this year but no real urgency to move – “Monetary policy is accommodative, but it’s not that accommodative.”

    • Draghi said QE is unlikely to come to an “abrupt” end. So it seems we have an indirect QE extension, since it should take about 4-6 months to fully taper, so by default, they will be giving the markets that much notice before QE is fully removed. The current QE is expected to end in March, but March also happens to coincide with Article 50. Is the ECB really going to go pantsless (no QE extension) into what could be a shock to their economy? It seems to me like we are staring at both an extension of QE, and a secondary extension via the taper timing. Bill Gross may be scrambling to buy back his European bonds now.

    • The 3mo libor rate was basically unchanged on the week. FFZ was down a half bp, so the libor-FF spread came in a touch, but not as much as I would have thought. I still think the risk to a BIG libor-FF move is lower (rather than higher, assuming we get one). I’ll look for a way to dip a toe in the water next week.

    • On the week, we finally got a curve flattening, as golds led a 4.6bp rally, while whites were down 0.4bps. I think the long end flattening has further to go… but it’s just a directional punt view.

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    [bullets from October 30, 2016]

    Happy Halloween! Trying to anticipate when puking stops is annoyingly difficult. We got some rate volatility last week, and with all the economic data expected next week, plus the FOMC, BOJ and BOE meetings, we could get some “frightful” price action. Here are my takeaways from the past week:

    • Both the UK and EU data improving after the Brexit vote is a little surprising. This has caused rates (especially in the long end) to puke. I think the markets need to get their Brexit story straight… is it going to be so bad as to cause a recession (and more QE), or is it going to be a neutral (or even positive) event for the respective economies?

    • US GDP was a very-robust 2.9%. But much of it was inventories and trade. An inventory build will take away from future growth, and the stronger dollar will put downward pressure on the trade balance. So it made sense for the markets to have a muted reaction.

    • GDPNow nudged up 0.1 to 2.1% for Q3. The advance Q3 official GDP was 2.9%. I would think the future revisions to the official will be skewed to the downside. I was hoping the NY Fed’s blackout of past Nowcasts before FOMC meetings was a glitch, but they again insist on silence when their Atlanta brethren are still publishing GDPNow.

    • Bullard says December is “most likely” for the next hike. The uber-dove Evans said it may be appropriate to raise three times by the end of 2017, and that the unemployment rate could hit 4.5% without triggering undue inflation.

    • I can’t see the Clinton re-investigation mattering… unless there is some shocking piece of news that comes out in the next 9 days. I’ve never known government to work that fast… especially when fielding calls from the DOJ, White House and Congress. But I suppose this has been quite a wacky year for voting. I also think that in the next nine days, you could start to see more negative bombshells – get ready for charges of corruption (on both sides), perjury, organized crime, embezzlement, rape, and the list goes on. This could mean more volatility than usual. The bookies have Clinton as a 3:1 favorite, for whatever that is worth (eh hem).

    • The 3mo libor rate was basically unchanged (+0.4bps) on the week. FFZ was unchanged, so the libor-FF spread widened a touch, but has been stable for a few weeks. It’s starting to look like this could be the new equilibrium level for now, but I think the risk is for libor-FF to narrow.

    • On the week, we got a relatively large bear steepening, with golds leading a 14bp selloff. I’m surprised that the selloff has been a “straight-line” selloff on reasonably positive economic news. I’m even more surprised that the front flies were down on a selloff. It’s mostly the Clinton re-investigation news that caused the reds to rally a few bps at the end of Friday. But even before that, the front flies didn’t have strong participation in the selloff.

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    [bullets from November 6, 2016]

    Election time! I think the markets are really confused because of the election. I discuss some of the election commentary in recent weeks that make no sense to me. Here are my takeaways from the past week:

    • In addition to the Presidential vote, look for control of Congress as well. Much less gets done without Congressional support. The House is solidly Republican and would take a small miracle for it to flip to Democrat. Control of the Senate is basically a coinflip. I would think it would go the way of the President, but stranger things have happened. I stumbled across a pretty good site, if you want to look at the various election scenarios: http://www.270towin.com/

    • Election terrorism warning. Terrorism warnings are always annoying. Stocks go lower and rates go lower (like Friday), and you have less of an idea where “fair value” is. While the US elections are probably a great terrorism target, I am generally of the belief that when the warning is issued, it becomes less likely. I’m not saying it’s impossible, but it’s like trying to rob a house when the neighborhood is expecting it. It would be incredibly dumb/ballsy.

    • It was another Goldilocks Employment Report. Labor participation was weak (hence the lower unemployment rate), but otherwise it was very constructive, and more than what Fed needs to see to hike rates gradually.

    • GDPNow is a whopping 3.1% for Q4. Nowcast is 1.6%. How can two models that look at the same thing be so different?!? I have to admit the luster is starting to wear off of GDPNow. If I was going to make GDP predictions that were 1.0% off, I can do just as well picking 1.8% out of a hat. All right, I suppose these models are still better than me guessing… but not by much.

    • Fischer was a little hawkish. He said the US labor market is close to full strength. He also ended his speech with “as we approach and perhaps to some extent exceed our employment and inflation targets.” It was not clear if he was speculating or just theorizing, but he probably didn’t need to put in the last part about “exceed.” Fischer said if labor participation remains flat, we would need 125-175K to prevent unemployment from creeping higher. If we assume a 0.3 decline in labor participation per year, the economy only needs 65-115K jobs per month to maintain full employment. Lockhart said the bar is high for not hiking next month (quote in the next section).

    • The 3mo libor rate was basically unchanged (-0.3bps) on the week. FFZ was up 0.5bps, so the libor-FF spread widened a touch, but has been stable for a few weeks.

    • On the week, we got a belly-led rally, with blues leading an 8.5bp rally. The short flies we had in the belly of the curve really did well. The front flies, not so much. But being short 2x as many belly flies helped. I discuss positioning in the “Flip Update” section.

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    [bullets from November 13, 2016]

    We have a full week of post-Trump curve moves under our belt and it’s a good time to discuss changes in some of our curve assumptions in the next section. Here are my takeaways from the past week:

    • Yellen said the Fed would hike “relatively soon.” She also suggested that the Fed would be gradual after that. There was no real impact of the election on Yellen’s comments. This does not mean she thinks there is no impact – she seems to be in a “let’s see what Trump does” mode before adjusting.

    • Yellen also said she was not stepping down and defended the independence of the Fed. Yep. Just as I mentioned two weeks ago. She is feisty.

    • Hilsenrath agreed that Trump is not going to want a hawkish Fed chair. So pricing in additional hawkishness because of a new Fed chair in 2018 does not make sense.

    • The Fedspeak is on board with a near-term hike. Kaplan said “you’ll see us in the near future remove some accommodation.” Rosengren said that only significant negative news could derail a “plausible” December hike. He also said the Fed would tighten faster with more stimulative fiscal policy. Tarullo was cautious but seemed open to a hike. Bullard supports a Dec hike. Kashkari said little has changed, and that 2% inflation is a target – not a ceiling. Harker favors a hike and the Fed may have to hike more aggressively if Trump enacts fiscal stimulus. Dudley said it was too soon to speculate on fiscal policies. In a nutshell, most people are on board for a hike, and the dot plot should be slightly higher.

    • GDPNow is up 0.5 to 3.6% for Q4. Nowcast upgraded Q4 0.8 to a very respectable 2.4%. Retail Sales and Housing Starts were impressive.

    • Speaking of housing, 30 year mortgage rates surged 43 bps since the election, to 3.96%. That’s a 5.4% increase in mortgage payments on a comparable home in ten days. If this continues, this could be a noticeable drag on the housing sector, as homes become less affordable. Higher long term rates could also affect equities, as a higher neutral rate could decrease discounted cash flow valuations by a similar magnitude. And I’m not even going to get into what happens to a leveraged global economy when rates increase. I may discuss the impact of rising rates (without a commensurate increase in revenue) in a future post.

    • The 3mo libor rate was up 1.1 bps on the week. FFF7 was down 3.5bps, so the libor-FF spread narrowed a couple of bps. This makes it more likely that EDZ6 fixes a little higher than 99.00 on a Fed hike, for those of you looking at the 90 strike in the front options.

    • On the week, we got another large (18.5bp) golds-led selloff. But this time, the front flies led, which is more “normal.” Speaking of the shape of the curve, I wanted to review some of the key drivers of the shape of the curve in this new environment.

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    [bullets from November 20, 2016]

    We have a full week of post-Trump curve moves under our belt and it’s a good time to discuss changes in some of our curve assumptions in the next section. Here are my takeaways from the past week:

    • Yellen said the Fed would hike “relatively soon.” She also suggested that the Fed would be gradual after that. There was no real impact of the election on Yellen’s comments. This does not mean she thinks there is no impact – she seems to be in a “let’s see what Trump does” mode before adjusting.

    • Yellen also said she was not stepping down and defended the independence of the Fed. Yep. Just as I mentioned two weeks ago. She is feisty.

    • Hilsenrath agreed that Trump is not going to want a hawkish Fed chair. So pricing in additional hawkishness because of a new Fed chair in 2018 does not make sense.

    • The Fedspeak is on board with a near-term hike. Kaplan said “you’ll see us in the near future remove some accommodation.” Rosengren said that only significant negative news could derail a “plausible” December hike. He also said the Fed would tighten faster with more stimulative fiscal policy. Tarullo was cautious but seemed open to a hike. Bullard supports a Dec hike. Kashkari said little has changed, and that 2% inflation is a target – not a ceiling. Harker favors a hike and the Fed may have to hike more aggressively if Trump enacts fiscal stimulus. Dudley said it was too soon to speculate on fiscal policies. In a nutshell, most people are on board for a hike, and the dot plot should be slightly higher.

    • GDPNow is up 0.5 to 3.6% for Q4. Nowcast upgraded Q4 0.8 to a very respectable 2.4%. Retail Sales and Housing Starts were impressive.

    • Speaking of housing, 30 year mortgage rates surged 43 bps since the election, to 3.96%. That’s a 5.4% increase in mortgage payments on a comparable home in ten days. If this continues, this could be a noticeable drag on the housing sector, as homes become less affordable. Higher long term rates could also affect equities, as a higher neutral rate could decrease discounted cash flow valuations by a similar magnitude. And I’m not even going to get into what happens to a leveraged global economy when rates increase. I may discuss the impact of rising rates (without a commensurate increase in revenue) in a future post.

    • The 3mo libor rate was up 1.1 bps on the week. FFF7 was down 3.5bps, so the libor-FF spread narrowed a couple of bps. This makes it more likely that EDZ6 fixes a little higher than 99.00 on a Fed hike, for those of you looking at the 90 strike in the front options.

    • On the week, we got another large (18.5bp) golds-led selloff. But this time, the front flies led, which is more “normal.” Speaking of the shape of the curve, I wanted to review some of the key drivers of the shape of the curve in this new environment.

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    [bullets from November 27, 2016]

    I hope you enjoyed your Thanksgiving weekend. Last week was relatively quiet but the next 1.5 weeks could be a great time to get into your strong view trades, for reasons discussed in the next section. I also discuss why taking a FOMC December hike bet may be noisy, and present some new trade thoughts. Here are my takeaways from the past week:

    • GDPNow is unchanged at 3.6% for Q4 and Nowcast is up 0.1 to 2.5%. The strong durable goods number didn’t kick in much, but it is a noisy number. Black Friday brick and mortar retail sales were weak, but online sales were strong. It will be interesting to see if the stronger online sales will cannibalize Cyber Monday sales.

    • The 3mo libor rate was up 2.1 bps on the week. FFF7 was down 1bp, and the libor-FF spread widened a bp. Now it is looking like EDZ6 will fix lower than 99.00 on a Fed hike, for those of you looking at the 90 strike in the front options. EDZ6 looks like it could get very close to pinned at that strike.

    • Fischer suggested that fiscal policy should be used to improve productivity. In particular, he cited focusing on infrastructure, education, private investment incentives and lower regulation, rather than just giving the economy a short-term boost. He also said that there needs to be caution when unemployment was already at 5% and the federal debt already elevated. He implied he would not tolerate a significant overshoot in inflation.

    • Trump did not say much about fiscal stimulus in his Day One video. It’s not clear to me if withdrawing from Trans-Pacific Partnership is just a negotiating tactic. As a “businessman,” I’m assuming he understands the importance of trade. As it is, the Chinese and Russians are negotiating another regional trade deal. A lessening of regulations could give a boost to certain sectors of the economy, like energy and banking. That’s a start towards Fischer’s idea of stimulus.

    • On the week, we got a bear flattening with whites leading a 3.2bp selloff. The year flies centered in the blues were beneficiaries of the move, with those flies being up 1.5bps on the week. What I find most interesting about the bear flattening is that it is occurring from a very low level of rates. The high year spread is still less than 2 hikes per year (EDH7-H8 spread is 45.5bps). This seems to be the continual foreign buying.

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    [bullets from December 4, 2016]

    If you had told me a few months ago that the unemployment rate would have plummeted to 4.6% and the Z6 1yr fly would have been -5, I would have said you were insane. And yet we shorted the fly and made 3 bps. These are strange times, but this followed directly from the “drivers of the curve in the new regime” I posted a couple weeks ago. I have some more drivers this week. Here are my takeaways from the past week:

    • The Employment Report was very “constructive.” Keep in mind that this time of year is probably one of the most difficult to seasonally adjust. I suppose the whisper on payrolls was higher after ADP, and wages and labor participation were disappointing. But the single number the Fed considers the most important is the Unemployment Rate. That was shockingly low, and making me consider buying some 2E midcurves put tails.

    • GDPNow dropped(!) 0.7 to 2.9% for Q4 and Nowcast is up 0.2 to 2.7%. I’m a little surprised that GDPNow dropped so much, but I suppose it was high before. The data has been much better the past month. The global economy seems to have picked up some momentum going into the end of the year.

    • Powell said the case for an increase in rates has “clearly strengthened.” He sees the main risks to the outlook from abroad – he is not alone with this view on the FOMC. Kaplan and Mester are also on board for a rate hike. Kaplan said the Fed should take a wait-and-see stance toward Trump’s economic ideas. It’ll be interesting to see if the others agree and the dots don’t change materially. While the consensus is probably for the dots to have a small upside bias, there is a tail risk that we get dots that are 25+bps higher.

    • The OPEC deal seemed to come out of nowhere. This will raise inflation risks in the short term. But longer term, the combination of higher oil prices and lower Trump energy regulation should help US production and put some downward pressure on oil.

    • On the week, we got a bull steepening with the reds rallying 2.9bps and the golds selling off 1.8bps. The curve had been looking too flat. A combination of some short covering ahead of the Italian referendum and Mnuchin suggesting the Fed would look at 50-100 year bonds explains most of the move. If the markets are going to put in an overly flat curve, why wouldn’t the Treasury consider the longer end? Speaking of which, since Mnuchin is an ex-banker, if he wants to go further out the curve, he should figure out some way to borrow on another yield curve that is cheaper than financing at the US Treasury rate.

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    [bullets from December 4, 2016]

    The ECB was less dovish last week. But that’s a far cry from being hawkish. I discuss the ECB and the rest of what I consider the “Six Pillars” of the long end bid. Here are my other takeaways from the past week:

    • Trump selected an “anti-labor” Labor Secretary. I didn’t care about any of this other choices so far. But choosing Pudzer, who was a critic of minimum wages, overtime, and the Affordable Care Act did raise an eyebrow. It will be interesting to see how much Pudzer pulls Obama’s policies back. I suspect Trump is going to (eventually) pull back some entitlements, so we could have some interesting things going on in Retail Sales, payrolls, hourly wages, labor participation, just to name a few things. Let’s see what Pudzer does, and see how populist Trump actually is.

    • The Fed meeting is next week. I’m not sure any drastic changes to the statement need to be made. They may make a reference to future fiscal stimulus, but other than that, they have a “data dependent” statement. It seems uncharacteristic of the Fed to give a strong signal, when all they want to do is see some more data before hiking again. The primary thing I’m focusing on are the dots. If they are not going to tell us in the statement what they are thinking in terms of hikes (most likely), they may tell us via the dots. As usual, you probably want to ignore some of the high dots (George’s posse), and pay attention to the fourth dot from the bottom (who is Yellen, plus or minus one spot). The predominant Fed rhetoric on fiscal stimulus seems to be that the Fed wants to see what happens before making any “premature” judgements (a la Dudley on Monday). While the risk may be for slightly elevated dots, it would be noteworthy if the “4th dot” moves at all for 2017 or 2018.

    • GDPNow dropped 0.3 to 2.6% for Q4. Nowcast is on their pre-FOMC break. The fact that the business surveys have done better is not a surprise (lower regulation, lower taxes, investment incentives, etc). But considering how the nation seemed to be in mourning after the Trump win, I’m surprised consumer confidence has risen as sharply as it has. I suppose the S&P going to the moon always helps…

    • Barron’s just had a cover with “Get Ready for Dow 20,000.” This is supposed to the ultimate in market jinxes. Think Sports Illustrated cover. I am not an old wife spreading tales, but just letting you know what is out there. I found this interesting considering how many people have been saying the equity markets are overstretched.

    • On the week, we got a bear steepening with the golds leading a 15.2bp selloff. The selloff was all post-ECB. As mentioned in the email on Thursday, people who were saying the longer time extension was worth more than the lower monthly amount were mistaken in their analysis. But in the same breath, Draghi said they could increase if needed. This leads me to my Market Thought for the week:

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    [bullets from December 18, 2016]

    I was surprised at the FOMC interest rate reaction, but I suppose when weighing all the factors, it’s not unreasonable. Now we should be back to data dependency. Here are my other takeaways from the past week:

    • My interpretation of the dots was slightly bearish. The post-FOMC emails are in the Appendix. Below is a summary of my dots analysis [see attachment]:
    The dots were bearish – the “core” dots moved 14bps, which is a little more than expected. But more importantly, I do not think Yellen or Dudley’s dots moved for 2017 and 2018. The other thing to note is that the long run dots did not move much. The Fed seems to be sticking to the low neutral rate story (for now).

    • However, there were a number of non-dot reasons to come away bearish. Some members did not incorporate fiscal stimulus in their projections (possibly Yellen and Dudley), “fiscal policy is not obviously needed to provide stimulus to help us get back to full employment,” and Yellen didn’t recommend running a hot economy as an experiment. These things were mostly known to a large degree, but along with the dots and some short covering prior to the Fed meeting, these little things just added fuel to the fire.

    • The Fed Funds Effective Rate post the FOMC was exactly 25bps higher. Interestingly, the FFER for the day of the meeting (announcement) was the old rate for the second time in a row. So this pattern does not appear to be an aberration. On my spreadsheets, I am using 10% of the new rate for the day of future FOMC meetings.

    • Liquidity is back in the long end of the ED curve. After a several-day hiatus, the algos and locals seem to be back in the long end. That was a good Flip trading opportunity while it lasted… the year flies further out got a little too high, and some of the double flies got to very attractive levels.

    • GDPNow was unchanged at 2.6% for Q4, but Nowcast dropped 0.9 (over two weeks) to 1.8%. Nowcast is only projecting a 1.7% Q1 2017. This is hardly the stuff of more aggressive hikes, but most of the recent steepening is based on fiscal stimulus next year. How much stimulus we actually get remains to be seen. This supports our “gradual in 2017 but faster in 2018” story.

    • On the week, we got an old fashioned 25.7bp belly-led selloff led by the greens. Open interest declined 157K on EDM7. The 3mo fly around EDM7 strangely declined 1.5bps on a sell off. This is why H7 3mo double fly (a Flip trade) collapsed during the week. I suppose with EDM7 pricing in more than 1 full hike, it makes sense the bears would want to take profit. The more interesting curve move was around EDU7. The 6mo fly around EDU7 increased 7bps on the week and the 3mo fly around EDU7 increased a whopping 4.5bps! For reference, the next largest 3mo fly increase on the curve was 1bp. This is why post-FOMC, F37 and F38 looked too low, and we jumped on it. This also led us to some other related Flip Trades that I sent out on Friday, which I will summarize in a later section.

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    [bullets from December 25, 2016]

    Merry Christmas! “Not a creature was stirring, not even a mouse” is probably a good way to describe the markets last week. Here are my takeaways from the past week:

    • Deutsche Bank settled its MBS case with the DOJ. DB was the driver for at least two major short squeezes last year. Also in the news, Monte dei Paschi got bailed out last week by the Italian government. Imagine that! Governments won’t let key banks go under! The takeaway should be that it takes nothing for some narrative to take hold and the shorts to get squeezed – no matter how absurd the story is. In 2016, we saw it with: China collapsing, DB going under, oil collapsing, commodities collapsing, European bank contagion, Brexit causing a global meltdown, and a Trump victory causing a global calamity. That’s a lot of over-hyped narratives! I’m wondering if the absurd narratives for next year will be bullish or bearish – because now you are starting to hear of people talking about 6% ten year rates. This speaks to larger tails than the recent tight trading range suggests, and more opportunity.

    • Speaking of narratives, there is talk of another Scottish referendum. This could be an “interesting” side story to Article 50 at the beginning of next year – Scotland will surely cause an implosion of the global economy [sarcasm intended]. Because as we know from Mike Meyers, “if it’s not Scottish, it’s crap!”

    • Both the Fed Funds Effective Rate and the LIBOR fixings seem to be stable since the Dec FOMC meeting. The FFER has been steady at 66bps (25 bps higher than prior to the FOMC meeting). The 3mo libor fixings have also been stable relative to Fed Funds. This gives us all available tools to take positions on Fed meetings for next year. Taking a view on a particular Fed meeting is the topic of this week’s trade theme.

    • GDPNow dropped 0.1 to 2.5% for Q4, but Nowcast is unchanged at 1.8%. Nowcast’s projection for Q1 is up 0.1 to 1.8%. We had Q3 GDP revised up to 3.5%. But this still leaves us below 2% growth for the entirety of 2016.

    • On the week, we got a 7bp bull flattening led by the golds. The curvature move was benign. As we would have expected based on the large short positioning in the market, we got some short covering ahead of the holidays. Even though the week was fairly quiet, we have yet another interesting positioning story…

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