Friday, November 13, 2015

S&P's Get Hit, But No Strong Treasury Reaction

On Tuesday we reviewed a situation that showed the S&P 500 index, many Eurodollar and Treasury futures as being ‘stretched’ and at risk of reversing (S&P 500 Index and Treasuries Both Reversing (for a time)...).  Additional technical conditions pointed toward that risk as well.  While always fearful that an interest in being ‘the smartest guy in the room’ had clouded right-thinking, we suggested that weaker equity prices in part would buoy Treasury prices. 

 While the S&P emini has declined by over 2% since Tuesday’s close, Treasuries have only advanced marginally.  The advance however has caught many by surprise as they would have expected further selling on the back of the stronger than expected employment report from a week ago. 

Yesterday’s parade of Fed officials in public speeches did not halt the modest Treasury advance.  At the same time, the hard fall in the S&P index (and European equities) did not provide as much tailwind to fixed income buying as imagined. 

The slew of economic data due out today should drive fixed income prices today.  Retail sales has long disappointed and households have more than content to save additions to their income over the last years.  Producers prices with a lag feed into consumer prices and neither have been menacing for over a generation.  Finally, the U of Michigan gauge on consumer sentiment…including inflation expectations will provide additional insight into likely future spending patterns. 

Currently my interest lies in finding overbought levels up the curve to benefit from continued pricing of the early stages of a Fed normalization of monetary policy.  Recent data will allow the Fed to move forward with a December initial policy rate move and any further strength in data will provide enough confidence by economic agents to price an additional rate hike at the March FOMC meeting.    



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