'Happy' New Year Jay Powell: Meet The Dreaded Full Frown

Authored by Jeffrey Snider via Alhambra Investment Partners,

I’m going to break my personal convention and use the bulk of the colors in the eurodollar futures spectrum, not just the single EDM’s (June) contained within each. The current front month is January 2019, and its quoted price as I write this is 97.2475. The EDH (March) 2019 contract trades at 97.29 currently and it will drop off the board on March 18.

Three-month LIBOR was fixed yesterday at a fraction higher than 2.80%, meaning that if it stays around or above that level someone is losing money on it. The futures price isn’t directly translatable but back-of-the-envelope it works out to an expectation for 3-month LIBOR on that date in March to be less than what it is fixed now.

In other words, the market is seriously betting LIBOR is coming down not two years from now but in the short run. That expectation only grows the further out in time (down the curve).

Inversion, as noted earlier today, had been limited to more distant years centered around 2020. The eurodollar curve now sports inversion from the front month all the way out to September 2020.

This is not a curve, not a normal one anyway, it is a clear signal of trouble right in front of us.

In fact, almost the entire curve is currently below yesterday’s 3-month LIBOR. But strong economy or something. They really don’t know what they are doing.

Central banks are not central.

Happy New Year Jay Powell, the curve sarcastically frowns upon your ridiculously overoptimistic forecasts.

From here on, you are going to want to avoid taking any advice from Bill Dudley on the topic of eurodollar futures and inversions.