Peek Into The Future Via Commitment Of Traders This Week

Following futures positions of non-commercials are as of September 15, 2020.

10-year note: Currently net long 14.8k, up 5.3k.

The Fed Wednesday said rates will stay zero-bound through the end of 2023. The fed funds rate in March was lowered to a range of zero to 25 basis points. FOMC members also upgraded their outlook on the economy. This year, they now expect real GDP to contract 3.7 percent and the unemployment rate to reach 7.6 percent by year-end. In June, they expected the economy to contract 6.5 percent with an unemployment rate of 9.3 percent.

It is hard to reconcile these two conflicting statements. If things are not as bad as previously thought, why is this not reflected in policy? Markets nevertheless are telling the Fed to do more. The central bank recently said it would allow inflation to rise moderately above its two percent target. Markets, on the other hand, are essentially treating this as a pipe dream, suggesting more QE is needed to achieve this.

Real rates are already negative. The Fed already holds $7.06 trillion in assets, down slightly from record $7.17 trillion from early June. At the end of last year, the balance sheet was $4.17 trillion. Markets still want more monetary morphine. The Fed, which has been bitten by the wealth effect bug, has itself to blame. It has hinted that it will backstop equities, among others. The question then becomes, how long before markets force the Fed’s hand? In other words, is it stocks correcting 10 percent, 15 percent, or any other number?

30-year bond: Currently net short 147.7k, down 12.7k.

Major economic releases next week are as follows.

The Z.1 report (2Q20) will be published Monday. This is a comprehensive report on the financial accounts of the US.

Existing home sales (August) come out Tuesday. Sales jumped 24.7 percent month-over-month in July to a seasonally adjusted annual rate of 5.9 million units. From May’s 3.9 million, sales have rallied 49.9 percent.

New home sales (August) are on tap for Thursday. Sales in July rose 13.9 percent m/m to 901,000 units (SAAR) – the highest since December 2006. From April’s 570,000 units, sales are up 58.1 percent.

Durable goods orders (August) will be reported Friday. July orders for non-defense capital goods ex-aircraft – proxy for business capex plans – dropped 0.2 percent year-over-year to $66.1 billion (SAAR). This is the fifth straight y/y drop, with improvement from down 7.3 percent in April.

WTI crude oil: Currently net long 553.9k, up 29.5k.

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