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Final Countdown

01 May 2019 by jbchevrel

Due to Labour day and Golden Week, today was a quiet small-move session for CDS in general. In London time, CDX IG is -0.2 and CDX HY -1.8. Many markets (Japan, China, most continental Europe and many EMs) were closed. And the FOMC has met for 2nd day, decision @ 1900 LDN. Data-wise we got better-than-expected ADP +275k vs. est. 180k (141k to 225k) which was dismissed by markets, and Mfg PMI came in line 52.6 vs 52.4 exp. But ISM Mfg missed, @ 52.8 vs 55 exp. Consequently, Atlanta Fed GDP ticked down from 1.3% to 1.2%. Canada not looking great either despite crude prices. PMI in contraction territory 49.7 (lowest ever – TS starts may2016). In rates space, a US broker I won’t name mentions $15m+ DV01 2yT longs being added over the past week or so by fast money accounts. Seemingly hoping discussions on ‘insurance cuts’ or any noise about 2.5 target. The former looks less unlikely than the latter. The ‘framework-type people’ probably think that the bar is low for the Fed to sound hawkish vs expectation, with a cut priced in by early next year. Trump calling for QE/100bp cut didn’t trigger much reaction either, yesterday. Looking at data, financial conditions and asset prices, the ‘framework-type people’ will probably be tempted to say that the (massive) Fed’s U-turn we saw over the past six months is on the back of an accrued influence by the White House. In the medium term, if that theme gains traction, a risk is that the Fed gets seen as too political/willing to finance the US twin deficits. The potential resulting loss of credibility could then lead to a higher premium into the back end, probably bad for credit and EM spreads.