Peek Into The Future Through Futures

Following futures positions of non-commercials are as of January 21, 2020.

10-year note: Currently net short 302.5k, up 79k.

The FOMC meets next week – on 28-29,  the year’s first meeting.  Markets do not expect the Fed to move. 

This comes on the heels of three 25-basis-point reductions last year, to a range of 150 to 175 basis points.  As things stand, Fed funds futures are leaning toward one more 25-basis-point cut by November/December.  Should it come to pass, the policy rate obviously will have dropped further – closer to one percent.  For this to occur, the US economy likely needs to decelerate quite a bit.

In this scenario, the Fed’s traditional monetary toolbox is just about empty.  As relates to the benchmark rate, there are not enough arrows in its monetary quiver.  The bank is all but certain to use non-traditional methods, such as quantitative easing.  Arguably, it already is.  SOMA (System Open Market Account) holdings have gone up from $3.55 trillion late September last year to $3.76 trillion this week.

Prior to this latest buildup, the balance sheet was getting trimmed, but from a very bloated level.  SOMA holdings, which make up the majority of the Fed’s balance sheet, peaked at $4.24 trillion in April 2017, up from under $500 billion pre-2008/2009 financial crisis.  Despite the nearly 11 years of expansion in the economy, the Fed was not able to cut its balance sheet to the right size.  Last fiscal year, the US budget deficit crossed $1 trillion, and this likely only gets worse, and with it the size of the Fed’s balance sheet.

30-year bond: Currently net short 60.4k, up 3.2k.


Major economic releases next week are as follows.

New home sales (December) are due out Monday.  Sales rose 1.3 percent month-over-month in November to a seasonally adjusted annual rate of 719,000 units.  The cycle-high 730,000 was hit last September.

Tuesday brings durable goods orders (December) and the S&P Case-Shiller home price index (November).

In the 12 months to November, orders for non-defense capital goods ex-aircraft – proxy for business capex plans – inched up 0.4 percent to $69.3 billion (SAAR).  This was the first y/y growth in five months.  Orders peaked at $70 billion in July 2018.

Nationally, home prices in October appreciated 3.3 percent year-over-year.  This is much slower than the 6.5 percent pace recorded in March 2018 but a tad stronger than last July’s 3.2 percent.

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