Peek Into Future Through Futures, What To Expect Next Week

Following futures positions of non-commercials are as of March 10, 2020.

10-year note: Currently net short 214.6k, up 57.9k. (SPTL)

Next week, the FOMC meets.This follows a 50-basis-point emergency cut of last week, to a range of 100 to 125 basis points.In the futures market, traders expect one full point cut on Wednesday. Then, we are talking zero-bound territory, which also means the next round of stimulus will come from unconventional measures.

During and after the 2008/2009 financial crisis, the Fed launched three iterations of quantitative easing, pushing its balance sheet into bloated territory. SOMA (System Open Market Account) holdings went from under $500 billion pre-crisis to $4.24 trillion in April 2017.This week, they were $3.87 trillion, up from $3.55 trillion late September last year. 

It is all but certain the Fed will be deploying new tools in the months/quarters to come.Lael Brainard, FOMC governor, suggested recently the central bank might turn to yield control – a la Japan targeting a longer-term interest rate.The Fed is yet to try out purchases of corporate bonds, a practice pursued by both the ECB and the BoJ.The latter also buys equity ETFs. 

In the end, it is not what the Fed does that matters, but if markets have conviction in what it does. Unlike in the past, last week’s intra-meeting cut was unable to soothe investor nerves. The coronavirus is proving to be a threat to the smooth functioning of the global supply chain. Markets are not convinced the Fed has the right tools for this problem. It is too soon to discard the ‘do not fight the Fed’ axiom, but markets’ most recent reaction function is a reminder that the bank does not have a cure-all.

30-year bond: Currently net short 62.6k, up 20k. (TYX)

Major economic releases next week are as follows. 

Treasury International Capital data (January) is due out Monday.In the 12 months to December, foreigners net-sold $3.5 billion in US stocks. This is massive improvement from net selling of $214.6 billion last April – a record. 

Tuesday has on tap retail sales (February), industrial production (February), JOLTS job openings (January) and the NAHB housing market index (March).

January retail sales rose 4.4 percent year-over-year to a seasonally adjusted annual rate of $529.8 billion – a record. The last time sales dropped y/y was in October 2009. 

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