April 30. BoJ downgrades outlook, Nikkei -2.7%. Can’t happen here?
–Well at least ONE of the Fed’s models seems to be working: Atlanta Fed’s GDP Now had a forecast of Q1 GDP of +0.1 and it actually came out at +0.2 (rather than the consensus expectation of 1.0%). As an aside, the Fed’s Econ Projection at the March FOMC for 2015 GDP growth is 2.3 to 2.7%.
–The FOMC acknowledged slower growth, but clings to the idea that it’s all transitory. BoJ also downgraded its outlook but refrained from additional QE; Nikkei is down 540 or 2.7% after yesterday’s holiday. Brazil raised rates by 50 bps.
–The dollar again weakened, with DXY making a 2 month low at 9468, having been at 100 in mid April. (EUR around 112 as of this writing). We’re now in an environment where stocks and bonds appear somewhat vulnerable at the same time, which makes sense, given that both asset classes had been underpinned in part by safe haven plays and the strong dollar. Beware the temptation to buy bonds just because stocks are soft. The curve steepened yesterday with new recent highs in 2/10 at 147, 5/30 up 3 at 131.8, and red/gold euro$ pack spread, which jumped nearly 6 bps to 128.375. With the market becoming slightly more circumspect about both the US economy and prospects for rate hikes, it’s the front end that will remain supported.
–On yesterday’s sell off (ten’s up 6 bps to 203.5), TY futures open interest jumped 60k or around 2%. There was new buying in both TYM and TYU 126p, on the latter for 49/64 covered from 127-285 to 29.5 in 10k. Vol was hit after the Fed, for example, as futures were lower I quoted 2EM 9837 straddle with a small 24.5 bid, but it settled 23.5. Technical signals on the long end of the curve remain bearish.
–Data releases today include ECI expected +0.6, Personal Income and Spending +0.2 and +0.5, with PCE Core expected 1.4% yoy. Job Claims expected 290, and Chgo PMI 50.0 from a weak reading of 46.3 last.
