Feb 4. 5 yr echoes start of 2015
–From a Bloomberg article this morning: “Goldman Sachs Group Inc. and Pacific Investment Management Co. say bonds are poised to fall and traders aren’t prepared for how far the Federal Reserve will raise interest rates.” From Bill Gross’ monthly missive: “…don’t go near high risk markets, stay safe and plain vanilla.” Dudley yesterday leaned towards the latter viewpoint, suggesting that tightened financial conditions are more than just a “blip” intimated by Esther George on Tuesday. The market has clearly squeezed out tightening expectations, with near euro$ calendar spreads again falling to new lows. EDH16/EDH17 settled at just 19 bs, down 4.5 on the day and 45.5 bps since the end of the year! EDM16/EDZ16 traded as low as 8.5.
–It was a volatile session Wednesday across many assets, clearly driven in part by position exits. In terms of data, non-mfg ISM was weak at just 53.5 vs 55.1 expected. ADP data was in line at 205k. The five year note trade as low as 1.20. The low (close) since the mid-2013 taper tantrum was 115.6 on Jan 30, 2015. In fact, the magnitude and speed of this year’s move in fives has been similar to the start of 2015 as shown in the attached chart. So perhaps a bounce in yields is coming, certainly there is plenty of hope for a change in this year’s trend. The risk is that the general anti-establishment social mood evidenced in the rise of Trump and Sanders has spilled over into financial markets, where faith in central bankers and their policies may further crumble.
–In the latter half of the session crude oil mounted a strong rally, apparently on renewed talk of production cuts. By the end of the day CLH had traded to 32.75, the exact 0.618 retrace from Thursday’s ‘production cut’ rumor high of 34.81 to yesterday’s o/n low of 29.41. Amazing swings! Oil has the appearance of trying to put in a bottom, this time helped by a hefty decline in the dollar, with the dollar index falling right to its 200 day moving average, down 1.9% on the day at the 200 day and ultimately ending down 1.6%. A weaker dollar and stronger commodity complex would likely go a long way in arresting January trends in many markets.
–Today’s news includes Jobless Claims at 277k. Nonfarm Productivity -2.0. Factory Orders -2.8%.
