Interest Rates
morganstanley.com
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Note to macro trend players.
Read the first three articles
This is the first time I have ever read the US Review and Preview usually I only read Roach. I happened to see a discussion on inflation and decided to read everything. I am glad I did. Look at the snips I found. IMO something is up (or do I mean down) when the two biggest hawks on the FED have turned into doves. There is something bad out there in the economy, consumer sales, GDP, jobs, or something else that we do not yet see for this turn to happen. Hawks don't normally turn doveish after 7% GDP figures. What's cookin?
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United States: Review and Preview
Treasury yields plunged over the past week, reversing just about all of the significant losses seen in response to the run of strong economic data that followed the October 28 FOMC meeting. Dovish comments on monetary policy from regional Fed Presidents Poole and Santomero, against the backdrop of a very successful refunding and a more mixed tone to the week's key data releases after the string of upside surprises seen in the prior couple weeks, drove the market higher.
With even the man perceived to be the most hawkish of the Fed Governors and Presidents arguing that the rate hike priced in for March was not on the agenda, the futures market was forced to significantly scale back the tightening embedded in fed funds futures and eurodollars the past week. St. Louis Fed President Poole told Bloomberg that while "policy is conditioned by the evidence that stares us in the face, not on the calendar," the current "environment (of accommodative policy) could extend well beyond March," as sustainable productivity gains of 3 to 3 1/2% or more indicate that existing slack in the economy will be worked down only gradually.
Ironically, Poole has argued most forcefully against the pre-commitment strategy pursued by the FOMC in referring to a "considerable period" of "policy accommodation" in recent FOMC statements, but he has now become the first Fed official to actually put the phrase in the context of a more specific time frame.
Philadelphia Fed President Santomero, also generally considered to be on the more hawkish side, expressed a similar sentiment, saying, "In light of significant excess capacity and benign inflation pressures, any policy adjustment need not take place in the near future." Certainly, it seems that, contrary to recent overblown investor fears, there is a solid consensus at the Fed that a move to raise interest rates is not imminent, even if there is internal disagreement about how this view should be communicated. This was clearly not at all consistent with futures pricing coming into the past week, and a significant repricing occurred in the wake of Poole and Santomero's remarks. On the week, the rate on the April fed funds futures contract fell to 1.105% from 1.19%, shifting the odds of a 25 bp rate hike by the March FOMC meeting from 75% to 40%. The July contract rallied to 1.39% from 1.605%, while the December 2004 eurodollar contract surged to 2.355% from 2.715%. We continue to see the Fed on hold until late Q3 of next year.
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congrats to long Eurodollar players
Mish |
