January 5, 2022

 As the Fed owns up…

Solid new lows today in Eurodollars

All markets spend time moving at varying speeds…and of course, sometimes not moving at all…And as of 3 months ago, the Eurodollar market had been just that, not moving at all…dead sideways for some 16 months…and expectations from virtually every genius Wall Street analyst AND the Federal Reserve Board were that interest rates would remain unchanged UNTIL 2023…But as I have been repeatedly writing here, in the Eurodollar Futures market (which, by itself, is bigger than all of the futures markets on the planet COMBINED), rates had already begun moving higher, and that furthermore, Eurodollar futures would LEAD the Fed, NOT the other way around, which IS exactly what we’ve been seeing…Getting specific, the Fed has YET to make its first interest rate raise but Eurodollar futures have already pushed rates up by almost a full percent by next December, and I believe, are potentially on their way towards rates being up to at least the 2% level by then.

As one more time, I will say that  I think the move has just begun…and more importantly…and as is noted in the news flash following, now that the Fed is FINALLY getting on board, I do think we have reached the point in this move where, from here, the Eurodollar market’s “speed” will be accelerating on the downside.

Wed Jan 5 – 2:07 PM EDT

Federal Reserve official signaled greater discomfort with high inflation at their meeting last month, where they eyed a faster timetable for raising interest rates this year.

Most central bank officials , in projections released at the conclusion of their Dec 14-15 meeting, penciled in at least three quarter-percentage-point rate increases this year. In September, around half of those officials thought rate increases could wait until 2023.

Minutes of the meeting, released Wednesday, showed rising concern that higher inflation could persist and force a more aggressive response from the Fed, particularly if businesses and consumers expect prices to keep rising rapidly. (which IS what businesses and consumers are expecting?)

For months, Fed leaders stuck to a view that higher price pressures in 2021 were caused primarily by supply-chain bottlenecks and would ease on their own. But Fed Chairman Jerome Powell had before the meeting signaled much less conviction about that forecast, and officials on the policy-setting committee last month broadly shared its views.

I continue to recommend buying puts here. I continue to think we have a LONG way to go…The Fed has basically “owned up” to misreading the whole inflation thing…and with having more or less wasted the past 6-9 months with their “transitory” forecast, my guess is that they are going to be now acting VERY aggressively as they try to catch up…And having personally traded this script in the past, where the Fed is already “behind the curve,” but also now dealing with the highest inflation rates in decades, I think that 1/2% raises have become a very real possibility…And as noted on the chart below, I believe that 98.50, or 1.50% LIBOR, has now become a realistic target by next summer. After all, when you get down to it, I don’t think even 1.50% rates are going to slow down ANYTHING…and that IS the purpose of raising rates.

There are 4 SCHEDULED Fed meetings between now and mid-June. I think the odds are high that at their Jan 26-27 meeting they will announce their 1st raise...and it MIGHT be for a full 1/2%...and who knows how big they might go at the successive three meetings? Doing the math, even if it's just a 1/4 at each of those, that takes Fed Funds (their actual rate) to at least 1.25%, which does infer 1.50% LIBOR...or the 98.50 level. And I would add that, in the past, when behind the curve, they have also had emergency meetings as well...specifically to make "can't wait" interest rate moves. So again, I think 98.50 six months from now is almost a minimum objective.

Here is the option we are buying at current levels…

If you think this makes sense, I urge you to not just sit there and watch it happen…And again, it is NOT to late to be getting on…

And if you are already on it? I think the new lows are a decent confirmation that you could add some here…

Call me if you’re interested.

Thanks,

Bill

770-425-7241

866-578-1001

All option prices in this newsletter include all fees and commissions. All charts, unless otherwise noted, are by Aspen Graphics and CRB.

The author of this piece currently trades for his own account and has a financial interest in the following derivative products mentioned within: Eurodollars