Big Shift In Speculative Positions In US Bond Markets
Axi | May 23, 2017 11:30
Originally published by AxiTrader
The US dollar has been under a lot of pressure recently as the data flow weakened and as bond rates headed back toward 2.20%.
That combination is a clear sign that even though stocks remain well bid many traders across broader financial markets are really questioning the economic outlook for the United States now that the scandals engulfing the White House appear to have derailed the key elements of Trumpflation - growth, tax, and infrastructure - to an uncertain time in the future.
Yet the bond rally, the weakness in the US dollar, and big shifts in speculative positioning in bonds, the Euro, and other currencies has occurred in an environment where expectations of a June hike remain high at 78.5% according to the CME's FedWatch tool.
No doubt that's because the Fed, in the statement accompanying the May FOMC meeting, saw "the slowing in growth during the first quarter as likely to be transitory" and signalled more hikes are coming.
That's something has been reinforced by most Fed speakers over the past month or so - except perhaps Minneapolis Fed president Neel Kaskari and his St Louis Fed counterpart James Bullard who consistently warn that now is not the time for what they see as excessive rate hikes given the level of economic activity and inflation.
Indeed just last Friday Bullard (a non-voter this year) said on inflation that readings are "weak, they've come down and they are too low for the Fed to reach its inflation target". That, he said, meant the Fed had "gone in the wrong direction and a little bit too sharply for comfort".
And that seems to be the vote of bond and currency traders as well recently. As the Fed readies to hike again next month these markets appear to be discounting that rate hike in favour of a less positive outlook for the US economy.
And this is where the rubber hits the road for traders.
The result of this readjustment in thinking has been that the positioning for big speculative accounts in US 10-year bond futures has swung from short 302,299 contracts 4 weeks ago to long 240,010 as at last Tuesday according to the latest CFTC data released at week's end.
It's a similar story in the euro where traders were short 58,251 contracts 4 weeks ago and are now net long 37,604 contracts. That's a big swing and the longest euro traders have been since March 2014.
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And this could be important as we await the release of the Fed's minutes on Wednesday.
The market is now pretty long 10-year bonds and euro. That doesn't mean the market is wrong. It simply suggests there is a lot of negativity baked into the cake when it comes to the outlook for the US economy and the US dollar right now.
The minutes are likely to reflect a Fed digging in for rates and the expectation growth will pick up - or is picking up already - from Q2 onward. As at May 16 the Atlanta Fed's GDPNow survey has been increased back up to 4.1%.
But the onus is on the data. And with the Citibank economic surprise index still below -30 there is certainly plenty of room for improvement if the Atlanta fed is right on its growth estimate.
As always, it's the data. It's always the data. But positioning suggests any upside shock in US data might get bond and forex traders moving again.
German Ifo, Markit preliminary PMI's for Germany, the US, and the globe together with Q1 GDP for Germany and the US along with the minutes, jobless claims, and personal consumption expenditures will all help traders decide whether bond and Euro bulls have got too excited.
Or not as may be the case.
It's may not be as quiet a week as many believe.
Have a great day's trading.
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