June 14. Fed fine-tuning; a world of central control
–Just after the close of the pit, WSJ’s Hilsenrath released a blog saying the Fed was likely to push back market expectations of rate increases. http://blogs.wsj.com/economics/2013/06/13/fed-likely-to-push-back-on-market-expectations-of-rate-increase/ Interest rate futures immediately exploded higher, with greens jumping nearly 10 bps. Ten year note rose almost half a point from 129-005 settlement to 129-145. June euro$ midcurve options expire today, leaving short calls scrambling to cover as the market gapped higher.
–Having successfully communicated a change in sentiment regarding a pullback in QE, the idea that the Fed should attempt to fine tune market positioning is overreaching in my opinion. After seemingly endless accommodation, a change in stance by the central bank necessarily leads to some degree of market overshoot, and tens didn’t even trade to last year’s highest yield level, so it’s hard to argue that things have gotten out of hand. Let economic circumstances determine whether rates have moved higher too quickly. Central planning has a way of backfiring, as is evident in Japan. Stocks however, were comforted by the idea that the rich uncle hasn’t abandoned support, and rebounded with a joy ride higher yesterday.
–In terms of data, clues were already apparent that inflation is falling, and market prices of precious metals provide another hint. Headwinds associated with even small rate increases have been reported: Foreclosures ticked up from a 75 month low and the WSJ ran this headline: Refinancings Plunge as Bond Yields Rise.
–News today includes PPI expected +0.2, Core +0.1. Industrial Production +0.2 from -0.5. Consumer Sentiment 84.5. In other news, BBG reports that China had a failed auction: “China’s Finance Ministry failed to sell all of the debt offered at an auction for the first time in 23 months owing to a cash squeeze that threatens to exacerbate a slowdown in the world’s second-largest economy.” Can’t control everything….
