CoT This Week - What Funds Are Buying, Future Hints

Following futures positions of non-commercials are as of June 8, 2021.

10-year note: Currently net long 173.4k, up 118.6k.

The FOMC meets next week. This is the year’s fourth scheduled meeting; four more remain. Not much is expected to occur in the benchmark rate front. The fed funds rate remains zero-bound – in a range of zero to 25 basis points; the status quo will be maintained. This is the conventional side of monetary policy.

The other side – the unconventional arm – involves its balance sheet, and the expansion thereof. In early March last year, the Fed held $4.24 trillion in assets; by Wednesday this week, this had ballooned to $7.95 trillion. Every month, the central bank has been spending up to $120 billion in purchases of treasury notes and bonds ($80 billion) and mortgage-backed securities ($40 billion).

This is where things are beginning to get a bit uncertain. Inflation is accelerating, with core CPI up 3.8 percent year-over-year in May (chart here). The official line of the Fed is that this is transitory, and its focus remains on jobs (more on this here), not on inflation.

At some point, the pace at which the Fed is accumulating assets will have to stop. The question is when, and how it will go about achieving this. We all remember the taper tantrum of 2013, when treasury yields surged after it said it would, at some future date, reduce the pace of purchases of treasury bonds.

Chair Jerome Powell and team will do their best to avoid a repeat of that. The goal is to prepare markets ahead of time, and venues like next week’s meeting can be used for that purpose. Fingers crossed!

30-year bond: Currently net short 70.6k, down 23.2k.

Major economic releases for next week are as follows.

Retail sales (May), producer price index (May), industrial production (May), the NAHB Housing Market Index (June) and Treasury International Capital data (April) will be published on Tuesday.

Retail sales edged up 0.2 percent month-over-month in April to a seasonally adjusted annual rate of $619.9 billion – a record. A year ago, sales languished at $409.9 billion.

Producer prices rose 0.6 percent m/m in April, spiking 6.2 percent y/y. Core PPI increased 0.7 percent and 4.6 percent respectively over the same time period.

Capacity utilization inched up 0.6 percent m/m in April to 74.9 percent. In April last year, utilization hit the post-pandemic low of 64.2 percent.

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Disclaimer: This article is not intended to be, nor shall it be construed as investment advice. Neither the information nor any opinion expressed here constitutes an offer to buy or sell any ...

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