Thursday, March 19, 2015

ED Shorts Scramble While TY Longs Celebrate Fed

Treasury and Eurodollars screamed higher following the Fed’s SEP report yesterday showing the Fed capitulating toward earlier market based pricing.  The Eurodollar futures yield curve flattened by 15 basis points throughout the first 9 quarterly contracts and the Treasury curve steepened from 5’s-30 by 7 bps.  Open interest was 134K lower in Eurodollars indicating that shorts scrambled out of ‘unclean’ positions.  Treasury futures all found open interest higher TU +17K, FV +4K, TY +43K, US +6K and WN +5K indicating that the long contingency won the day taking home fuel for the fire. 

After my tirade yesterday I sat back and considered again the back to back to back weaker retail sales figures, the weaker manufacturing surveys, the lower inflation readings and lack of additional wage pressure shown following the decent up-tic in January.  It is understandable that the Fed might review their policy rate forecast and adjust them more toward market projections. 

The Fed is ‘data-dependent’. They always have been.  Sometimes the data was expected to be so be benign for so long that they could use date based guidance without much concern for their forecast being run over by reality.  Nearing a lift off for normalizing policy rates above the zero bound, the Fed is rightly adjusting its focus more sharply. 

Because of the disparity between expectations and the message the Fed provided yesterday, as evidenced by the large post FOMC meeting move in many asset classes, I am left wondering if there was intent to surprise in order to show a new resolution toward data-dependency. 

As further information is revealed we shall get a better sense as to whether the Fed themselves were caught unprepared for the spat of weaker economic numbers toward the latter days before the FOMC meeting that left them without the ability to communicate in the ‘black-out period’ more efficiently that their earlier forecast was so terribly off the mark. 

If instead, the Fed’s surprise was intended to ‘wake-up’ market participants to mindfully look after data and reduce confidence in the transparency of the Fed’s communications; they may have invited a more spirited trading environment.  All else equal however, businesses will likely curtail investment in an environment where they are left less confident they have an understanding of where monetary policy is headed. 

Below the Citi Economic Surprise Index is shown at a new multi-year low of -71.90, a level not seen since August 2011.  We wonder aloud when economists will reduce enough their expectations that the economic data starts to surprise more positively.    

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