I guess I took my own advice a little too literally. I did write that when the eurodollar futures curve first inverted, it was going to be dull. Didn’t start out that way, of course, with a small bit of theatrics right during that front week in December when the inversion first showed up. Ever since then, it has stuck to what I had said on Day 2 about what you should expect, or not to:
For the time being, our focus for now remains on the twisting. And we shouldn’t expect much more out of it. At least, for now.
Though this was truly a Big One, a serious signal right up in the top tier of monetary and financial warning signs, it still goes on the backburner in this first stage. I hadn’t realized, however, that while I’ve kept it in the corner of me eye for myself, I haven’t updated it here in over a month.
Sorry about that (since more than a few have asked, and prices on these things can be somewhat difficult to find, I’ll leave a couple links at the bottom where everyone can go so that you don’t have to depend on me for them).
So, where are we with the curve? Pretty much in the same shape, if a different level of nominal prices. When it comes to the twisting, it’s been just as I wrote up top and initially; we didn’t expect a whole lot and not a whole lot happened.
This doesn’t mean nothing has happened to the curve. On the contrary, it went a tiny bit un-inverted yet still kinked/flat through the latter half of December, varying somewhat in its flat-ness over those weeks.
Perhaps most important of all, the curve’s changes you see above during the first two weeks of January fully corroborate everything I’ve written recently with respect to the rest of the “bond market”, Treasury curve, in particular, about how to interpret this BOND ROUT!!!!
It’s all about the Fed rather than improving growth even inflation prospects.
The market here, like the front end of the Treasury curve, is being pushed up because Jay Powell’s hawks have surmounted any remaining omicron doubts. It’s clear sailing into rate hikes; at least the first few of them. Thus, the eurodollar curve has in its entirety moved up (shown above).
If this was improving economic potential or inflation, then the flatness would have gone away at the same time the curve pushed upward nominally. Instead, just like the Treasury curve, those rate hikes are colliding with the same Taper Rejection skepticism and therefore, this week, the kink in the eurodollar curve went back fully inverted again!
It’s not much, just half a bip in the same contract space around the December 2024’s, yet, the important part is as I wrote from the very beginning:
While this is a major milestone in the monetary system’s decidedly anti-inflation/growth journey, it is hardly the end point of it. On the contrary, though it takes a lot of negative, deflationary potential to distort the curve in this way, we need to see if the market sticks with that potential rather than just some flashing rush of otherwise fleeting concern.
Some modest twists and turns during the last month, and the same curve skepticism first raised back when everyone thought omicron was the big worry remain even though omicron today is an almost totally faded influence.
The kink/inversion has indeed stuck; as I had pointed out from Day 1, this isn’t about the pandemic.
Growth scare and Taper Rejection.
The FOMC says consumers are normalizing to high CPIs and the unemployment rate pictures a very tight labor market absolutely brimming with wage therefore inflation potential. These justify, in the official view, tapering and rate hikes which the market fully agrees the FOMC will get to carry out. No COVID to stop Jay’s minions.
Given this, despite this, the undefeated bond market also thoroughly disagrees with those pure assumptions, the macro astrology being employed to drive those Fed changes. For one, there is no evidence “expectations” play any role in what is always a monetary phenomenon – and traders in Treasuries like eurodollar futures are the actual money, so they’d know – and despite the contention the labor market is tight we’ve seen a faulty unemployment rate mislead Jay Powell already and not very long ago.
It’s the height of predictability on all counts.
On top of those doubts, there’s others starting with growing deflationary potential inside the monetary system (TIC, collateral, BIS, etc.) raising the probability something goes wrong with it and spoils whatever growth potential actually exists. Then there’s China in the real economy along with the rest of the global system which did not at any point look like the US goods economy.
And now a whole bunch of data showing, yes, transitory “inflation” and the very real potential for a slowdown maybe downturn or worse.
The small eurodollar inversion doesn’t tell us when or what, certainly not at this stage. What the kinked curve does indicate is simply how these negative potentials I just listed are very real, very serious, and are too probable to become a big problem at some point in the not-too-distant future (as I warned before, you don’t take the eurodollar curve literally) that it requires drastic measures like those it takes to upset and so distort this thing.
So long as the inversion or just the kink in the curve is limited to the small depths we’ve seen since it first began back in late October (when the flattening first become obvious), there’s nothing imminent to worry about; it’s all just non-specific downside probabilities. The current problem is how they are far greater than anyone in the mainstream, at the Fed, or shouting about inflation would admit.
The next thing we will be watching is for any additional curve twisting beyond just a half bp or even a few bps of inversion. Until then, it’s useful enough to validate our thesis about what’s going on in the rest of the global bond market (front = Fed, not growth nor inflation only deeper whiffs of Conundrum No5). Other than that, I still don’t anticipate it to be anything but boring for the next little while.
Eurodollar Futures Price Data:
If you’re looking for the current intraday prices, and don’t mind them being 10 minutes behind, the CME where these contracts trade displays near-real time price and contract data for all those in the colors (they don’t break them down by color, but that’s easy enough in your head if you can count by groups of four).
Should you want/need historical data, you can use Bloomberg or some other data provider. These are available at sites like Barchart.com, where you have to look up each contract individually (it’s not hard to find all of them on the whole curve; just use the search function). Here’s the link for the current front month (for the whites, anyway):