CoT: See How Hedge Funds Are Positioned Through Futures

Here are the following futures positions of non-commercials are as of January 28, 2020.

10-year note

Currently net short 270.5k, down 32.1k.

The Fed has a dual mandate of maximum employment and stable prices. The post-Great Recession recovery/expansion has been uneven, but jobs have been plentiful. Through last December, the cycle, which is five months short of completing 11 years, created 21.4 million non-farm jobs. But inflation remains subdued. This gives the central bank an opportunity to focus on either jobs or inflation, depending on if it wants to lean hawkish or dovish.

This week’s FOMC meeting was a non-event, in that no action was expected, and none came, but the inflation language was tweaked a little. During Wednesday’s post-statement Q&A, Chairman Jerome Powell said that the goal of that tweak was to “send a clearer signal that we are not comfortable with inflation running persistently below our two percent symmetric objective.” It increasingly feels like the Fed is laying the groundwork for more stimulus.

Last year, the fed funds rate was cut by 75 basis points in three 25-basis-point increments, to a range of 150 to 175 basis points. Ahead of this week’s meeting, fed funds futures were forecasting a 25-basis-point cut in November/December with odds in the 50 percent. By Friday, markets readjusted in a big way, assigning 50/50 odds of a cut by the April meeting and another one by December. Should it come to pass, the policy rate will have dropped to 100-125 basis points. A few more cuts, and the Fed will have no option than to expand its balance sheet. In fact, this is already happening.

SOMA (System Open Market Account) holdings increased from $3.55 trillion late September to $3.77 trillion this week. These assets, after having peaked at $4.24 trillion in April 2017, are up from under $500 billion pre-2008/2009 financial crisis, were getting trimmed, but are rising again. Reading the Fed’s tea leaves, the balance sheet is headed a lot higher in quarters/years to come. This is bound to reverberate through a whole host of assets, not the least of which is the bond market.

For the week, the 10-year Treasury yield (1.52 percent) lost 16 basis points.

30-year bond

Currently net short 55k, down 5.4k.


Major economic releases next week are as follows:

The ISM manufacturing index (January) will be published Monday. Manufacturing activity contracted 0.9 points month-over-month in December to 47.2, which is the lowest since June 2009. The index has been in contraction territory for five months through December.

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