The front end of the curve has predictably moved lower in response to the recent hike in the Fed Funds rate.
The second quarterly in the Eurodollar futures complex is trading in a range with a lower support level at around 98.50. See the chart below.
Coincidentally, we have seen the June 2020 quarterly contract move through its early March support level. Then, the contract retraced higher on a relative basis than the above September 2017 contract. See the chart below.
What is happening to the curve?
Since the “Trump rally”, moves in the back month spreads have been more range-bound than in the front month spreads.
Market sentiment has been developing toward the idea of persistent, scheduled increases in the Fed Funds rate over the next 2 years. The idea that these hikes should persist beyond a two year period is not being reflected in the movement we see further out on the curve.
To reflect a longer schedule of rate hikes, the market seems to want to see real confirmation that we will see significant growth in the economy – growth greater than the 1.9% rate we saw in 2016.
Historically and logically we expect Fed funds rate increases to provoke a slowing of economic expansion. This affects a flatter curve or less slope over the period we expect to experience that economic slowdown.
Of note: We do not see blue June trade lower after it rallies in response to Fedspeak. Simultaneously, the equity market sells off in response to hawkish tone or measures.
You Better Aks Somebody!
With equity strength, we could see nice and stronger negative correlation retracement in blue June.
Massive selloff in equities: be ready to buy ED red sector.
Long end trade guidelines? Key off of equity markets.
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