CoT: Futures Positions Of Non-Commercials

Following futures positions of non-commercials are as of August 25, 2020.

10-year note: Currently net long 72.3k, down 14.7k.

The 10-year Treasury yield (0.73 percent) is itching to break out of a five-and-a-half-month rectangle between 0.57 percent and 0.74 percent. Thursday, rates jumped six basis points in a volatile session to 0.75 percent, as the 10-year took a cue from Fed Chair Jerome Powell’s inflation comments at Jackson Hole.

The Fed has now adopted an “average inflation target”, under which it will seek to achieve inflation that averages two percent over time. This is a major shift in policy and likely means it is ready to leave interest rates where they are, which is zero-bound, for a long time.

The central bank wants inflation and would not mind if it exceeds two percent. A cynic might say this is an attempt to inflate away the nation’s heavy debt load. The US national debt stands at $26.7 trillion – and growing. Given the ongoing massive budget deficit, God knows where the debt burden is headed. Inflation will help erode its real value.

Rates will have to cooperate for this. A clean range breakout likely results in the 10-year heading back toward the June 5th intraday high of 0.96 percent. But if inflation expectations perk up as well, rates will not stop there. And in a leveraged economy, this will cause a problem, slowing things down and putting downward pressure on inflation – not what the Fed wants.

30-year bond: Currently net short 136.8k, down 7.9k.

Major economic releases next week are as follows.

The ISM manufacturing index (August) comes out Tuesday. Manufacturing activity in July rose 1.6 points month-over-month to 54.2 – a 16-month high. This was the third m/m increase after the index hit 41.5 in April.

Durable goods orders (July, revised) are scheduled for Wednesday. Preliminarily, July orders for non-defense capital goods ex-aircraft – proxy for business capex plans – increased 1.9 percent year-over-year to a seasonally adjusted annual rate of $66.1 billion. This was the third up month in a row after orders bottomed at $61.3 billion in April.

Labor productivity (2Q20, revised) and the ISM non-manufacturing index (August) will be published Thursday.

The preliminary estimate showed non-farm output per hour increased 2.15 percent y/y in 2Q20. This was the fastest pace in 21 quarters.

Services activity in July was up a point m/m to 58.1 – a 17-month high. In April, the non-manufacturing index hit 41.8.

Friday brings the employment report (August). After losing 22.2 million non-farm jobs between February’s record 152.5 million and April’s 130.3 million, the economy added 9.3 million jobs to July’s 139.6 million.

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