Newest CoT: Peeking Into The Future Thru Futures

Following futures positions of non-commercials are as of September 10, 2019.

10-year noteCurrently net short 300.4k, down 77.4k.

The FOMC meets next Wednesday.  In the futures market, the odds of a 25-basis-point easing currently stand at 80 percent.  This comes after a reduction of similar magnitude in July, which was the first cut since December 2008.  The fed funds rate stands at a range of 200 to 225 basis points.

After this, two more scheduled meetings remain this year – in October and December.  By the end of the year, traders are betting that there could be one more cut, although their conviction level is a lot lower than they have for a cut next week.

The Fed is in a bind, as data continue to come in mixed.  More often than not, this tends to happen at inflection points.  In the 12 months to August, core CPI rose 2.4 percent, which was the highest since September 2008.  That said, core PCE – the Fed’s favorite – remains relatively well behaved (chart here).  On the other hand, job creation is softening, with a monthly average this year of 158,000 non-farm jobs versus last year’s monthly average of 223,000.

In this sense, the question is not if more cuts lie ahead; rather, if more monetary stimulus at this stage in the cycle will be able to stop the economy from decelerating further.  The long end of the Treasury yield curve does not exude much confidence.  The 10-year Treasury yield (1.9 percent) nine sessions ago dropped to an intraday low of 1.43 percent, merely nine basis points from the record low 2.34 percent from July 2016.  Rates are rallying currently unwinding the oversold conditions they were in.  When it is all said and done, a new low in all probability is just a matter of when not if.

30-year bondCurrently net short 51.7k, down 15.5k.

Major economic releases next week are as follows.

Industrial production (August), the NAHB housing market index (September) and Treasury International Capital data (July) are due out Tuesday.

US capacity utilization dropped 1.6 percent year-over-year in July to 77.5 percent.  The cycle high 79.6 percent was reached in November 2018.

Home builder activity inched up a point month-over-month in August to 66.  The cycle high 74, which was the highest since July 1999, was reached in December 2017.

In the 12 months to June, foreigners sold $135.7 billion in US stocks, which is a big improvement from record net sales of $214.6 billion in April this year.

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