Friday, February 6, 2015

EDM5; Pricing June FOMC 'Normalization'

Strong payroll gains, positive revisions and more importantly the reverse of the surprise decline in average hourly earnings from the December report have generated a greater consensus that the Fed can move policy rates as soon as the June FOMC meeting.  This has been my forecast, as tiring as it may have been, for many months and it is a small comfort to now have my views closer in harmony with the majority.  It is a much greater satisfaction however to see the positioning strategies advised to clients thrive.     

There is a lot of history that goes into the pricing of Eurodollars and Treasuries at this stage and there will be a lot of data needed to influence many that a greater level of domestic growth is upon us.  We are running out of fingers to count the number of times accelerating mid-year growth failed to be sustained through the Q4 or Q1 next.  The Pavlovian bell has been rung again in the deceleration of inflation at home in the States and dispirited growth in Europe, Japan and China have become monsters under the bed – ever more frightening that the truth.  Some have taken the oil shock to imply a permanent condition of declining inflation and have inputted that theory into the pricing and attraction toward global long rates, in particular Treasuries.
We will remember that since September of 2012 the Fed has noted mid-2015 as a date-based guidance for when the Fed may begin policy firming. I might humbly submit that my FOMC report for that meeting argued the Fed would combine a new LSAP program with an extension of date based guidance.  The date reference was with respect to the likelihood the Fed would not firm policy rates until at least mid-2015.  That guidance having survived so long affords the Fed a wonderful opportunity to use it for the purpose of creditability gains.  The Fed will be credited a tremendous amount of ‘transparency’ should they be able to move forward with a ‘normalization’ which includes a policy rate move in June.

For guide, those having attended my advice that a settlement in EDM5 below 99.62 would result in a rapid decline toward 99.54, EDM5 settled at 99.615 on Thursday.  Today’s low (thus far) of 99.555 should afford some satisfaction. 

Thank you for your support.  Enjoy your weekend.   

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