Wednesday, August 5, 2015

Three Month Dollar Libor – Not Since 2012



Funding costs jumped yesterday in futures markets following the opening and again this morning in higher Libor settings.  U.S. Dollar 3 month libor rose 0.98bp to 0.3109, a level not seen since 2012.  The 6 month libor also rose a robust 1.79bp to 0.5038.  The advance in libor further signals the market readying for the Fed to lift policy rates above the zero bound. 


Increasingly, the market is pricing the odds for a September rate adjustment.  Yesterday, the Fed Funds futures, priced a 50% chance of a September hike, the highest such odds yet priced.  While many economists have been calling for a September rate move, the market has been pricing a greater chance for a December start date.  


In the July FOMC meeting statement, Fed officials continued to stress that their decision on when to raise the policy rate will depend on the data that is seen.  On Friday, the Bureau of Labor Statistics releases the July payroll data, arguably the most important input for whether the Fed will move in September.  While the Fed has stated that it is the trend in data that matters rather than a single data point, market participants are poised to respond strongly to the policy implications from this release. 


The last two sessions (Monday and Tuesday) have been turbulent.  Monday’s price action extended consistent bullish gains since mid-July, while Tuesday reversed the gains made on Monday and more. 


Historic price action in Eurodollar futures and Treasuries suggest that more often than not, prices tend to consolidate on the approach of the payroll data, indicating that the bits of information that are received in front of the payroll data are insignificant and not worthy of price adjustment.  That said, Treasury and Eurodollar prices are steady to slightly lower following the lower than expected ADP Payroll report.  It does appear that some recent longs are due to move to the sidelines before Friday.  


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