Commitment Of Traders This Week, Futures, Hedge Fund Positions

Following futures positions of non-commercials are as of December 18, 2018.

10-year noteCurrently net short 380.8k, down 13k.

With pressure growing from diverse quarters, including the White House, to stay pat in this week’s meeting, the Fed went ahead and raised the fed funds rate by 25 basis points to a range of 225 to 250 basis points.  In the futures market, a raise was priced in.  Not the FOMC outlook, which probably took markets by surprise.

Prior to this week’s meeting, the dot plot expected three more hikes next year.  Early October, US stocks began a sharp sell-off, even as the Treasury yield curve continued to flatten.  On November 28, Jerome Powell, Fed chair, himself walked back his previous hawkish bias when he said interest rates were “just below” neutral.  This was a U-turn for him.  On October 3, the same day the S&P 500 large cap index began its waterfall dive, he had said rates were still “a long way” from neutral, suggesting continued tightening in the weeks/months ahead.  To many, the November 28th speech was a signal that the dot plot this week would signal one hike next year, if that.

Come Wednesday, the Fed lowered 2019 projection to two hikes, leading to a mini-revolt of sort across asset classes.  Stocks sold off.  The yield spread between 10- and two-year Treasury notes dropped three basis points to 14 basis points in that session.  In the first half this month, the spread fell to 11 basis points twice.  The 10-year yield (2.79 percent) dropped from 3.24 percent on November 8 to Thursday’s low of 2.75 percent.  The long end continues to warn the Fed not to get too tight.  Now equities have joined credit.  Not to mention the collapse in crude oil.

While it is increasingly unlikely the Fed raises twice next year, Powell may very well be sending a message to the stock market.  Post-financial crisis, investors/traders have been conditioned to expect soothing words/action from the Fed as soon as stocks came under decent pressure.  The so-called ‘Fed put’ was routinely set in motion under Ben Bernanke’s leadership as well as under Janet Yellen’s.  At least by far, Powell is refusing to yield under pressure.  Here is some perspective.  Yes, the S&P 500 lost 18.1 percent from its September high through Friday’s low, but rallied 340 percent from March 2009.  Powell seems to be suggesting the Fed has done enough hand-holding.

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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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