An Opportunity For Volatility Bears

Following futures positions of non-commercials are as of March 17, 2020.

10-year note: Currently net short 251.1k, up 36.5k.

On Sunday, while cutting the fed funds rate by 100 basis points to zero-bound, the Fed also committed to purchase $500 billion in Treasuries and another $200 billion in mortgage-backed securities over coming months.  The goal was to lower rates, and to quote Chair Jerome Powell, to “restore market functioning.”  Things quite did not quite pan out that way – at least not right away. 

Monday, the 10-year Treasury yield closed at 0.73 percent. (SPTL)  By Wednesday, it tagged 1.27 percent, before coming under pressure and ending the week at 0.94 percent.  This recalcitrant behavior was similar to how equities reacted to the 50-basis-point cut – also intra-meeting – on March 3.  On the 2nd, the S&P 500 closed at 3090.23.  This week, it closed at 2304.92. 

It is too soon to declare that markets have lost conviction in the Fed’s prowess, or, for that matter, in major central banks.  But these recent developments are definitely a chink in the ‘do not fight the Fed’ armor

30-year bond: Currently net short 78.1k, up 15.4k. (TYX)

Major economic releases next week are as follows. 

New home sales (February) are due out Tuesday.  Sales jumped 7.9 percent month-over-month in January to a seasonally adjusted annual rate of 764,000 units – the highest since July 2007.

Durable goods orders (February) are scheduled for Wednesday.  Orders for non-defense capital goods ex-aircraft – proxy for business capex plans – rose 0.9 percent year-over-year to $69.6 billion (SAAR).  Orders peaked at $70 billion in July 2018.

GDP (4Q19, final estimate) and corporate profits (4Q19) will be published Thursday.

The second estimate showed real GDP grew at a rate of 2.1 percent in 4Q19. 

Corporate profits adjusted for inventory and capital consumption fell 1.2 percent y/y in 3Q19 to $2.08 trillion (SAAR).  Profits peaked as far back as 3Q14 at $2.19 trillion. 

Friday brings personal income/spending (February) and the University of Michigan’s consumer sentiment index (March, final). 

In the 12 months to January, core PCE – the Fed’s favorite measure of consumer inflation – rose 1.6 percent.  In the current cycle through January – that is 127 months – this metric increased with a two handle in only 11 months. 

Preliminarily, consumer sentiment dropped 5.1 points m/m in March to 95.9.  Except for last August’s 89.8, sentiment has remained north of 90 since November 2016, five of whom were 100 or higher.

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