Recap 9-05-13: Mea Culpa


No bids for US treasuries. 2y yields are now at the highest levels since mid 2011:

The problem is there isn’t much of a catalyst for any sort of turn around, and bad positioning and stop outs appear to be a persistent and continuing driver. The market reacts to expected changes in Fed policy, and Fed policy reacts to changes in the data. That’s ultimately what drove yields lower in the past. (2y yields in white, US economic surprise index in orange below) With data still fairly strong, and with global central bankers unwilling to act or talk about acting, (despite all their stupid talk about guidance and what not, which apparently was literally just words and nothing else!) it’s hard to make the case that this move is done, even though many rates products globally are terribly mispriced. (Because we are at the zero bound)

I had expected that forward guidance would’ve had more of an impact on market pricing, but clearly I was dead wrong about that. And if forward guidance can’t slowdown a sell off that now has rates pricing in hikes by mid 2014, I don’t know how much of an effect it will have. Why can’t mid 2014 rates price in 2 hikes? Historically, while the Fed is on hold, 2y yields have found buyers at 75-100bps above Fed Funds. That’s another 50bps higher from here.

In my opinion, the Fed had a strong hand in the revival of the economy, which means that this withdrawal of accommodation is likely to have an opposite impact. As a result of lags, however, we probably won’t begin to see the effects until 4Q, although the effects are likely to extend well into 2014. History suggests that it doesn’t make sense to bet on that view until there is some confirmation from the data, however, and that is still some time away.


  • ECB kept policy on hold as expected. The ECB forecasts did not change much (2014 growth forecast was actually revised a bit lower) and Draghi tried to sound dovish. It didn’t really work, as this chart from GS shows:

  • BoE kept policy unchanged as expected. No statement was released with the announcement, which was somewhat of a surprise, as some market participants thought that Carney would try to lean further against the rise in yields.
  • US ADP Employment declined to 176k vs 184k exp and 200k prev
  • Jobless Claims declined to 323k vs 330k exp and 331k prev
  • ISM Non-Manufacturing jumped to 58.6 vs 55 exp and 56 prev.
  • Australia Trade Balance dropped to -765mm vs 100mm exp and +602mm prev

Upcoming Data:

  • Fri: US Employment, Canada Employment
  • Weekend: China Trade Balance, CPI, Money Supply, Japan BoP, Australia Home Loans
  • Mon: Japan Eco Watchers Survey, Canada Building Permits, UK RICS, Japan Money Supply, Australia NAB Business Confidence
  • Tue: China IP, Retail Sales, Canada Housing Starts