This Week's Peek At What Noncommercials Are Buying, CoT

Following futures positions of non-commercials are as of May 25, 2021. 

10-year note: Currently net long 104.4k, up 72.7k.

In the week to Wednesday, Federal Reserve assets declined $19.3 billion week-over-week to $7.9 trillion but the prior week’s $7.92 trillion was a new record. On a four-week basis, the buildup is building momentum, with the latest week up $122.6 billion, versus $37.6 billion two weeks ago.

From early March last year, the Fed’s balance sheet is now up $3.66 trillion. The massive accumulation is obviously showing no signs of a let-up. If anything, the Fed seems more committed to purchasing $80 billion in treasury notes and bonds and $40 billion in mortgage-backed securities every month.

This is taking place at a time when a section of the markets – although not a majority – is beginning to worry about inflation. In April, core CPI jumped three percent year-over-year. This was then followed by Friday’s 3.1-percent increase in core PCE, which is the Fed’s favorite measure of consumer inflation. April’s y/y rise in core CPI was the highest since January 1996 and in core PCE the highest since July 1992 (chart here).

The Fed continues to hold the line that this was as expected and that it would prove to be transitory. As things stand, risk of runaway inflation – the kind that was witnessed in the ’70s – is low. This gives the Fed cover for their single-handed focus on jobs and not on inflation. The problem is the pace of the buildup of the balance sheet, unwinding of which is bound to reverberate through all kinds of assets.

The question is, when would the markets begin to seriously worry about tapering? Is it inflation at 3.5 percent, four percent or higher? Or, for that matter, should inflation persist at that rate for three months, six months or longer, before ringing an alarm bell?

30-year bond: Currently net short 119.4k, up 36.4k.

Major economic releases for next week are as follows. Markets are closed Monday for observance of Memorial Day.

The ISM manufacturing index (May) is due out on Tuesday. Manufacturing activity in April declined four percentage points month-over-month to 60.7 percent.

Labor productivity (1Q21, revised) and the ISM services index (May) will be published on Wednesday.

Preliminarily, non-farm output per hour increased 4.1 percent y/y last quarter – an 11-year high.

Services activity fell one percentage point m/m in April to 62.7 percent.

Friday brings the employment report (May) and durable goods (April, revised).

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