Wednesday, August 13, 2014

Retail Sales Adds to Pain of Hardened Short-Rate Bears



Yesterday we looked at evidence which suggested that the bearish contingency in Eurodollar futures is largely in place and growing despite some perceptions that Friday was an important turning point and that higher yields were on the near horizon.  Friday’s activities offered good reason to reexamine fundamental and technical conditions following the extraordinary price action on Friday.  However, there is not enough evidence at this stage to suggest with any confidence that either economic progress has accelerated meaningfully or that technical conditions indicated a great likelihood for a significant reverse toward lower prices (higher rates). 

Today’s retail sales was well below expectations (control group +0.1 v. consensus Bloomberg +0.4).  Stronger retail sales at this juncture might have supported the notion that payroll gains above 200K a month for a half year and the more recent rise in ‘quit rates’ were indication of strengthening consumer sentiment and a likely boost spending patterns.  The JOLTS US Quit Rate reached 1.8 in Oct ’13, and has yet to move above that mark.  The JOLTS Total Private Quit Rate bounced recently to 0.8 from a low of 0.5 reached in ’12.  While the latest (May) reading was the highest since late ’08, it has only recovered 27% of the high from ’07.  Clearly there is more room for improvement.  Finally, University of Michigan Consumer Confidence (Expectations) is still 3 points below the April reading, indicating some stall.  A recovery to new highs would better point to greater likelihood for increased consumer spending.   

We look forward to better times economically and recognize we are in an important transition period.  However, the evidence is not clear that stronger growth is imminent and the heightened uncertainty surrounding Fed policy intent is having an immediate and negative effect on growth while adding to a heightened volatility in assets and rates markets.

Reviewing quickly the EDH6 (Red March Eurodollar Future) contract highlighted yesterday, we might note that there has been 5 new highs since the late July low without a three session pause.  Today may mark a 6th new high, but thus far has only reached as high as Friday’s 98.835.  A new high and settle today would dismiss the bearish implications of the ‘shooting star’ from Friday and suggest additional gains forthcoming.  The ‘bearish harami’ from late-May (98.925 high close) would be the next area for resistance.   








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