Following Yellen's uncharacteristicaly hawkish tone, the odds of a July rate-hike have shot higher - now higher than June or September have ever been - to record highs. This has sent short-term bond yields higher, the yield curve dramatically flatter, stocks lower, and gold down...
With verious Fed presidents having whipping up the market into a hawkish frenzy in the past two weeks, leading to a dramatic repricing in summer rate hike odds with expectations for a July rate hike now over 50%, many can be "disappointed" by Yellen's speech today, at least according to Jeff Gundlach who said Yellen appears to be more cautious on raising interest rates and he expects her comments to be dovish again on Friday, when she is scheduled to speak at an event in Harvard-Radcliffe.
Following yesterday's surprisingly strong 2 Year auction, the US Treasury pulled off another blistering auction when moments ago it sold $34 billion in 5 year paper (Cusip R77), at a high yield of 1.395%, stopping through the when issued by 0.8 bps, a surprising outcome following two consecutive tailing auctions, with a Bid to Cover of 2.60, the highest since November 2014. Incidentally, the yield of 1.395% was lower than last month's 1.41% when June rate hike odds were in the single digits.
Asset markets aren't prepared for a hawkish Fed. As Bloomberg's Richard Breslow notes Fed speakers have even taken to the Sunday talk shows to beat the rate-rise drum as economics is morphing into punditry. They’re going to raise rates because they can, are independent, apolitical and can’t be bullied by foreigners. The numbers notwithstanding...
The Federal Reserve has created a semblance of normality, but by suppressing interest rates they have enabled non-linear, and very possible ugly outcomes, to become entrenched in US public debt dynamics. The euro crisis from 2010 to this day show how difficult it can be to regain investor trust when the unsustainability is first revealed for all to see.
Peddling some facts... "This is no longer statistical “noise” that can easily be brushed off."
The US Treasury yield curve is flattening again, with parts finally in 2016 surpassing the bearishness exhibited to start 2015. The mainstream is just now starting to notice likely because unlike last year there are no longer credible excuses to simply wish it away. “Transitory” is not a word you find much anymore, replaced instead by reluctant and forced acknowledgement that there is real economic peril here. Bearishness in the yield curve is not something new, however, only the notice of it.
Here is why US yields are, if anything, set to decline more: on the other hand, the US accounts for almost 60% of all positive yielding debt and 89% of the positive yielding debt which has a tenor less than 1YR (Figure 4). Also, US debt accounts for 74% of the positive yielding G10 debt in the 1 – 5YR sector.
First, It Was "Fu$k the Fundamentals", Now "It's Fu$k Contracts, Too" - Negative Rates Are Doing So Well in the EU!Submitted by Reggie Middleton on 05/16/2016 10:16 -0400
Oh, this is going to get messy - and as it doe the sell side will likely try to trow a positive (as in buy our inventory) spin that may trap a Muppet or two. But hey, that's the business model, no?
The main risk over the weekend was that markets, which have now dropped for three consecutive weeks the longest negative streak since January, would focus their attention on the latest batch of negative Chinese economic news released over the weekend, which missed expectations across the board, most prominently in Retail Sales and Industrial Production, and following Friday's disappointing new credit loan data, would sell off as the Chinese slowdown once again becomes a dominant concern. However, after some initial weakness, the risks were all but gone when first the USDJPY jumped on another round of deflationary Japanese economic data which led to renewed hopes of more BOJ easing and a jump in the USDJPY and thus US futures.
We've now seen three consecutive quarters of net tightening of C&I lending standards in the US (Figure 1, left) and previously whenever this has happened it has ultimately led to a full blown default cycle – albeit with only three cycles of data to examine. The series does tend to exhibit sweeping cyclical tendencies with momentum and is not prone to random fluctuations. So it's a worry that we've entered the net tighten stage and have stayed there for three quarters now.
"There is little doubt in our minds that $/JPY will keep falling in the near term, until Governor Kuroda is forced to respond with overwhelming force. We therefore hold to our structural view that $/JPY ultimately will go a lot higher. But in the short term, it will fall.... Until Governor Kuroda is willing to grab the bulls by the horns and confront market fears over the BoJ’s balance sheet, the path of least resistance for $/JPY is down"