Quirks or kinks in the eurodollar futures curve are nothing new, materializing from time to time as much for technical reasons as anything else. Still, there are those instances – such as June 2018 – when these represent meaningful changes in outlook and condition. Back in the middle of that year, the sudden inversion in the curve along the 2020-21 contracts was a true game-changer.
That was when the “bond market” transitioned from skepticism about globally synchronized growth and its inflationary offshoot to outright betting against it. That inversion, properly interpreted, said that Jay Powell’s Fed wasn’t just wrong on inflation/growth, it was about to be proved wrong in such a way the FOMC would have to turn all the way around and start cutting rather than further hiking its rate “floors.”
The flattening curve before June 2018 was the market doubting Janet Yellen’s then Jay Powell’s rate hikes would get much farther; the inversion and thereafter were more hedging the kinds of serious global dollar shortage problems which would eventually lead to the whole thing moving in reverse.
Exactly how it turned out even though at the time conventional thinking (Inflation Hysteria #1) couldn’t have conceived this.
In 2020, another such quirk this time centered upon the end of year and in the opposite direction as June 2018’s inversion; the difference between the December 2020 contract and the first quarterly of 2021, for March. It never amounted to very much, still with Jay Powell speaking (and further highlighting) constantly about a “flood of digital money printing” (in the form of bank reserves) there was no reason for this modest bump in what should have been a beautifully smooth, uniform money curve.
Specifically, the December 2020 contract price was a few basis points higher than those around it in line of the curve. This meant, interpreted literally, that the market was hedging, very slightly, for some sort of end-of-year trouble despite the trillions in excess(ive) bank reserves; the higher December price corresponding to a small yet very noticeable probability for a LIBOR spike of some substantial sort to close out the year.
Nothing came of it, of course. Instead, 2020 ended with a slew of only positives if not everything apparently going right for once; from vaccines to Uncle Sam and rising prospects for global recovery or at least something closer to one.
But here we are again in the middle of 2021, and there it is again; the same exact quirk but now in a different place. Well, actually the same place only one year removed further ahead. The inversion is now pointing at December 2021, the malformity again pushing out to the next March (2022) contract. There are even more bank reserves this year than last, and there will be a whole lot more still by the time December rolls around and the contracts up to that month roll off the board.
Not a whole lot of confidence and trust in Jay Powell and his magic beans (sorry, bank reserves). It’s not preparation for financial Armageddon by any stretch, but it’s one of those things that really should not be there if the monetary situation was truly as widely advertised. To kink the curve for the second straight year, there’s a whole lot of anti-reflation (zero inflation) being traded in the assumptions pushing the curve out of whack even a few basis points like this. Repeatedly.
As of the current date, this thing is not in the same class as the June inversion had been. An interesting if generalized oddity that doesn’t take to fear beyond the usual baseline of monetary suspicion. If the Fed can’t keep the calendar chokepoints we all know about settled despite trillions in bank reserves…
The chances of something going wrong in the monetary system are therefore way, way too high especially given how it’s always characterized for the public as, again, some overwhelming flood of money. Added to the misconceptions about the current (over)usage in the RRP, also chalked up to “too much money”, small wonder everyone is confused about everything from inflation to bank reserves to the oft-erratic words lofting out from Jay Powell’s increasingly pursed lips.
You don’t quirk eurodollar futures at year-end if there is only too much money throughout the foreseeable future. Though simply a curve curiosity at this point, it represents suspicion and disbelief over a visible low point – meaning, not enough money – on the calendar which is being priced as a potential issue anyway.
And if that’s driving this specific curve point, what about any possibilities for not-visible low points, the unknown unknowns? Yeah, that’s the consistently flat, low nature of the entire curve even on reflation’s best day back in early April.
That this quirk is placed at year-end for the second year speaks to the generalized monetary problem of the uncertainty regardless of the Fed and its accounting byproducts. Those we need to keep an eye out for; a small kink which is already just above trivial might, at some point, transform into another warning about true dollar shortage (rising to something like June 2018’s).
Two massive CPI’s since early April, along with a slew of seemingly huge American economic data, and still it’s anti-reflation everywhere else along the eurodollar futures curve even where it isn’t presently kinked. The brief but comically inept rate hike panic of earlier this year a now-distant memory with compression in effect.
In truth, there never was any real chance for rate hikes, not according to the curve (and this year-end stuff one key reason why the curve, along with the yield curve, never moved all that much to begin with). Like everything else with the global bond market, anti-reflation – which is pretty much all the time – is downplayed in the financial media while any retracing no matter how truly trivial gets hyped up into the biggest thing ever.
That was never once the curve’s actual position, as I wrote back at the end of March during the strikingly small reflationary trend as it was already reaching its local endpoint:
This December 2024 position is basically saying the first half of the decade of the 2020’s will somehow, on average, be materially worse than the 2010’s even if slightly better than the single and singly awful year 2020 had been where inflation and economic growth is concerned.
But that’s not the message you see all over the internet despite it being right here in the right market.
For three months now, the curve has modestly compressed which, along with nominal Treasuries, put the outlook back closer to last year than anything resembling even 2018’s massive disappointment. Think about that for a second.
There’s simply no inflation on offer anywhere here. Instead, the most visible aspect is all the pieces lacking for it – only beginning with this year-end quirk which even if non-specific and generalized in nature is still a key piece of curve tilted in the exact wrong direction from recovery, growth, and inflation. What flood? Where’s this “too much money?”