This Week's CoT: Futures And What Hedge Funds Are Buying

Following futures positions of non-commercials are as of May 11, 2021.

10-year note: Currently net long 1.2k, up 8.5k.

FOMC minutes for the April 27-28 meeting will be made public on Wednesday. The meeting was a non-event – pretty much. The fed funds rate was left untouched at a range of zero to 25 basis points, as were monthly purchases of at least $80 billion of treasury notes and bonds and $40 billion of mortgage-backed securities. This was expected.

Thus, the minutes are not likely to contain anything that will surprise the markets. If anything, April’s CPI report – out on Wednesday – already accomplished that. Headline inflation surged 4.2 percent year-over-year last month, which was the fastest pace since September 2008, coming in way hotter than the consensus; core CPI similarly jumped three percent – the highest since January 1996.

The bigger question is if this would change the Fed’s policy stance (more on this here). Not likely. This is one month’s data. Besides, the central bank has said all along that it expects – even wants – inflation to run hotter than its two percent objective. Speaking the same morning post-CPI report, Vice-Chair Richard Clarida said he was “surprised” by the jump in inflation but stressed that this would prove transitory.

More important is equities’ reaction function. The kneejerk reaction on Wednesday was ‘sell first and ask questions later’. The Fed, bitten by the wealth effect, will start to worry if selling persists. The pedal is already to the metal – be it using conventional or unconventional tools. In this scenario, the task of tempting equity investors to take on risk and go up the risk curve becomes herculean. Right here and now, Jerome Powell and the team need not worry. Buy-the-dip mentality is intact.

30-year bond: Currently net short 96.6k, down 35.2k.

Major economic releases for next week are as follows.

The NAHB Housing Market Index (May) and Treasury International Capital data (March) will be published on Monday.

Homebuilder optimism in April increased a point month-over-month to 83. Earlier in November last year, the index reached a record high 90, three times the low hit in April last year.

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