The overnight session started the week off on a quiet note, with Japan out for Golden Week and no major economic releases. Volumes were very light, with TY and cash trading at about half the normal levels. The market edged slightly higher, driven by Turkish equity declines as the Turkish army attempts to block a presidential candidate and rumors of hedge fund distress in Europe — as well as the consistent overnight bid for Treasuries we have tended to see recently — particularly noteworthy given the absences in Asia.
Despite the lackluster start, this week holds the potential to be an interesting one — with PCE today, ISM tomorrow, the Refunding Announcement on Wednesday, and NFP on Friday. In addition, with the May FOMC meeting next week, we expect that the slate of official commentary set for early this week will draw ample attention — although we expect the Fed to limit guidance given the proximity to the meeting.
In addition to today’s PCE release, which is expected to show a moderation in pricing pressure, core-PCE consensus +0.1% MoM print, we also get Chicago PMI — expected to decline to 54 vs. 61.7. We also hear from Fed’s Moskow this morning, and while he tends to be more hawkish, we expect incoming Fedspeak to favor balanced and on net, expect the day to lean bullishly.
HIGHLIGHTS FROM U.S. GOVERNMENT BOND WEEKLY:
A glance at the charts will confirm that, since the start of April, the market has essentially traded in a range. While we are most certainly tired of this confining action, it nonetheless defines what’s going on — notably with both bullish and bearish news. This is the backdrop to what we expect will be a range-breaking week that lies ahead.
The question, of course, is which way it breaks. And on this score we will not provide any precognition. Our bias is, has been, and likely will be, for a bullish steepening move. The litany of reasons has been well espoused and so for the sake of brevity we will simply mention housing, manufacturing, business investment, and structural needs for fixed income.
But for the immediate term it’s a coin toss vis a vis the onslaught of fresh data. Our gameplan is to play the coiling range — defined as 4.80% to 4.60% in 10s and then broadening to 4.90% to 4.45%. The idea is to let the market tell us what to do and if those range parameters are broken either way, we’ll reverse positions and go with the break — buying straddles is a good idea.
TACTICAL BIAS: Our strategic views remain intact. If we’ve learned anything in the past week vis a vis the fundamentals it’s been more of the same; housing remains problematic (Existing home sales weak, New Home Sales up with downward revision), confidence has slipped with rising energy costs, people are willing to buy weakness (decent indirect bidding at all three auctions).
IF we learned anything new it’s that Asian buying has come back (for example, MoF data shows the biggest weekly purchase of overseas bonds by Japanese investors since early Nov) and that maybe something a bit less hawkish has crept into Fed thinking. This was evidenced in the Beige Book and comments by Fed officials (Fisher, Yellen). We’re not talking ease material, just tempering things. Both used the word `recession’; Fisher to say we’d avoid a recession, Yellen to suggest a small risk.
OVERNIGHT EVENTS:
* Turkish Lira and equity and bond markets sold off — as the military promised to block presidential candidate (because of his support for Islamist causes). Turkish stocks down 6.2%.
* China announced another 50 bps increase to 11% to its reserve requirement — starting May 15th — further attempt to cool overheating economy.
* Japan out on holiday — beginning of Golden Week.
* Yellen comments over the weekend — unwinding of imbalances may cause sharp market moves, below trend growth may mitigate inflation risk and US growth should rebound this year.
* UK Gfk Consumer Confidence, Apr. -6 vs. -8 Mar. Highest read since Oct ‘06. Still below zero and this index has not been positive since Mar ‘05. Gilts and EGBs generally stronger overnight, the grind higher does not appear to be data driven.
IMPENDING EVENTS:
* Personal Income, Mar — +0.6% vs. +0.6% Feb.
* Core-PCE, Mar — +0.1% vs. +0.3% MoM Feb.
* Chicago PMI, Apr 54 vs. 61.7 Mar.
* Construction Spending, Mar +0.2% vs. 0.3 MoM Feb.
NOTE: The views expressed are not of Bonds Financial but of the unaffiliated author. Bonds Financial Inc. makes no claim to and regarding the accuracy, correctness or completeness of the views expressed.
Posted by bondsblog as Morning Call at 7:17 AM EDT
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The case for an increase in the federal funds rate has just been bolstered by a jump in British inflation, which has pushed the pound above $2 for the first time since 1992.
To everyone except those in the financial markets, more inflation should lower the value of a country’s currency, since, in the real world, this is exactly what happens. Higher prices mean each unit of currency has less buying power, thus effectively depreciating its value.
But the financial markets are always one step ahead of everyone else (Well, most of the time).
When inflation goes above the government’s target, especially in a country such as Britain, whose central bank was given back its independence only 10 years ago after decades of being dominated by the country’s elected officials, the financial markets have come to expect that the Bank of England will act promptly to bring it to heel.
This would be accomplished by tightening up on money, thus producing higher interest rates. It is the prospect of higher interest rates, not the decline in its purchasing power, that pushed sterling past $2.
Traders are betting that the Bank of England will lift its base rate from 5.25% to 5.5% when the bank’s monetary policy committee meets on May 10.
Guess what? That’s just one day after the Federal Reserve’s next confab on its key lending rate, which also happens to be 5.25%.
If the Fed does not raise rates, the dollar will continue its fall against the pound as well as compared with the currencies of many other countries. Already down some 30% versus the pound since 2001, the greenback has also dropped about 15% against the Japanese yen and is down close to 40% against the euro, just to name a few.
While this may be helping economic growth by boosting our exports, it is also adding to inflation by boosting prices of imported goods. In turn, this is providing a cover for domestic firms to raise their selling prices, especially since tight labor markets and slowing productivity are increasing business costs and pressuring margins.
Monetary conditions worldwide are still loose. Witness the run-up in the price of gold to nearly $700 an ounce, the highest in about a year. As recently as early January, gold stood just above $600.
China’s sizzling growth is adding to our inflation by pushing up prices of global commodities, especially oil. And food tags are soaring as more and more corn is used for the production of ethanol.
Back home, the decline in housing is, ironically, adding to inflation by boosting rents. Accounting for one-third of the consumer price index, rents alone are up more than 4% from last year’s levels.
As we all know, inflation here in the U.S. is well above the Fed’s comfort zone of 2%. The Fed maintains that housing’s woes will not spread to the rest of the economy, and thus drag it into a recession.
If that’s the case, then a quarter of a point hike to 5.5% may not be enough to bring our inflation to heel
Dr. Irwin Kellner is chief economist for MarketWatch. He also is the Weller professor of economics at Hofstra University and chief economist for North Fork Bank.
NOTE: The views expressed are not of Bonds Financial but of the unaffiliated author. Bonds Financial Inc. makes no claim to and regarding the accuracy, correctness or completeness of the views expressed.
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Posted by bondsblog as FED Watch at 7:05 AM EDT
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U.S. Treasuries gained for a third day on speculation inflation will slow, which may persuade the Federal Reserve to lower borrowing costs.
Yields on 10-year notes fell by the most since March 13 yesterday as traders rebuilt bets the Fed will cut its interest rate later this year, after data showed consumer prices eased last month. Debt slid last week after minutes from the central bank’s March 21 meeting showed policy makers were more concerned about inflation than a moderation in growth.
“We have slowing growth and annoyingly high inflation, and on that basis the Fed’s going nowhere,” said Kit Juckes, head of fixed-income research at Royal Bank of Scotland Group Plc. “Yields went from the top half to the bottom half and on a bit of mixed data it’s stabilizing. If growth had slowed to 2 percent and inflation come off, doves would be on the ascendancy.”
The yield on the benchmark 10-year note fell 2 basis points to 4.66 percent as of 7:15 a.m. in New York, according to bond broker Cantor Fitzgerald LP. The price of the 4 5/8 percent security due in February 2017 rose 1/8, or $1.25 per $1,000 face amount to 99 21/32. Bond yields move inversely to prices.
The yield on two-year notes, more sensitive to changes in monetary policy expectations than longer-dated debt, fell 1 basis point to 4.66 percent.
“Treasuries can go up,” said Takahiro Honma, who helps oversee the equivalent of $1 billion in non-Japanese bonds at Meiji Dresdner Asset Management Co. in Tokyo. “Inflation is a lagging indicator and inventory adjustment in the U.S. is still going on.”
Honma, whose company bought 10-year notes as yields rose to 4.75 percent, said the yield may fall to 4.5 percent in the next two to three months.
Inflation Slows
U.S. core consumer prices, which exclude food and energy, rose 2.5 percent in March from a year earlier, down from the 2.7 percent rate in the 12 months through February, the Labor Department said yesterday. Including food and energy, prices rose by 2.8 percent, compared with 2.4 percent the month before.
The figures weren’t enough to erase concern that inflation will quicken.
“That’s better news obviously than we have seen in the last several months,” Fed Bank of Philadelphia President Charles Plosser yesterday told reporters in Cherry Hill, New Jersey. “The real question, of course, is will it continue, and that’s what we’re looking to see.”
The 10-year yield may rise toward 4.75 percent in coming days, said Lee Boon Keng, a fixed-income strategist with DBS Bank Ltd. in Singapore.
“The market is stuck in a range,” Lee said. “The market has not come to a consensus on the U.S. economy.”
Interest-rate futures contracts show traders see just a 27 percent chance the Fed will reduce its target for the overnight lending rate between banks by a quarter-percentage point to 5 percent by its Aug. 7 meeting. The odds rose from 20 percent at the start of the week.
Treasuries also rose yesterday after a Fed report showed industrial production declined 0.2 percent last month, following a revised 0.8 percent increase in February, a smaller jump than previously reported.
NOTE: The views expressed are not of Bonds Financial but of the unaffiliated author. Bonds Financial Inc. makes no claim to and regarding the accuracy, correctness or completeness of the views expressed.
To read the original source of this article, click here.
Posted by bondsblog as Market Trends at 7:09 AM EDT
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