CoT This Week: First June Look At What Hedge Funds Are Buying

Following futures positions of non-commercials are as of June 1, 2021.

10-year note: Currently net long 54.8k, down 49.6k.

In all likelihood, a trial balloon was floated this week. On Wednesday, Patrick Harker, the Philadelphia Fed president who becomes a voting FOMC member in 2023, speaking at a virtual event, said, “it may be time to at least think about thinking about tapering our $120 billion in monthly Treasury bond and mortgage-backed securities purchases.”

Just so it does not upset the markets, he right away said, “this is not something we are going to do suddenly, though.” They are trying to prepare the markets for a day when the Fed starts unwinding its already-massive balance sheet. In early March last year, the central bank held $4.24 trillion in assets, which have since grown to $7.94 trillion. Who knows how high it gets before tapering begins?

Harker’s comments come amidst a pickup in inflation in particularly the last couple of months (chart here). Thus, he may just be trying to sooth the markets that the recent rise in inflation is transitory, which is the line used by Chair Jerome Powell, and his team, all along. Or, he is sensing early signs of persistent inflation and feels the need to warn that monetary stimulus has gone too far.

Either way, it is a no-win situation. If inflation proves transitory, then the Fed will continue to expand its asset base, driving risk-taking to dangerous levels. If it is persistent, and the Fed starts tapering, this will reverberate through a whole host of assets, not the least of which is equities. Already, stocks are beginning to cherish softer-than-expected data, fearing a strong economy will lead to tapering sooner than later.

30-year bond: Currently net short 93.8k, down 25.6k.

Major economic releases for next week are as follows.

Tuesday brings the NFIB Optimism Index (May) and JOLTs (April).

Small-business job openings posted a new record in April by rising two points month-over-month to 44. In May last year, this sub-index languished at 23.

Non-farm job openings in March increased 597,000 m/m to 8.1 million – a new high. In April last year, openings reached a post-pandemic low of 4.6 million.

The CPI (May) is due out on Thursday. In the 12 months to April, headline and core CPI respectively jumped 4.2 percent and three percent, which was the steepest growth rate since September 2008 and January 1996.

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