Following futures positions of non-commercials are as of September 25, 2018.
10-year note: Currently net short 756.3k, up 71.6k.
Markets versus the Fed.
Odds of a collision next year continue to rise. Post-FOMC meeting this week, the dot plot kept its forecast of one more hike this year and three in 2019. There are two more meetings left this year – November (7-8) and December (18-19). In the futures market, a December hike is increasingly being priced in, with 80-percent odds, although they fell six percentage points after this week’s meeting. Next year, markets only expect one 25-basis-point hike.
If the dot plot is right, by the end of next year the fed funds rate will be in a range of 300 and 325 basis points, which historically is not that crazy high, but given where rates were post-financial crisis they would have come a long way. Before the Fed began raising in December 2015, rates were left between zero and 25 basis points for seven long years. This has obviously caused a buildup in leverage, particularly sovereign and corporate. A rise in interest payments will bite.
Then, there is the 10-year Treasury rate (3.06 percent). Fundamentally (due to lesser foreign demand for Treasury securities, rising federal budget deficit, planned reduction in the Fed’s Treasury holdings, etc.), there is a lot to argue for much higher yields on the long end. But the 10-year cannot convincingly get past 3.1 percent. There are bids under these notes (more on this here). If the fed funds rate continues to rise, and two-year T-yields follow, it does not take too long before the yield curve inverts. The spread between the two currently stands at 24 basis points. The Fed is between a rock and a hard place.
30-year bond: Currently net short 103k, up 36k.
Major economic releases next week are as follows.
The ISM manufacturing index for September comes out Monday. Manufacturing activity increased 3.2 points month-over-month in August to 61.3. This was the highest since 61.4 in May 2004.
Wednesday brings September’s ISM non-manufacturing index. Services activity in July rose 2.8 points m/m to 58.5. January’s 59.5 was the highest ever (data only goes back to January 2008).
Revised durable goods data for August is on tap Thursday. The advance report showed orders for non-defense capital goods ex-aircraft – proxy for business capex plans – rose 7.5 percent year-over-year to a seasonally adjusted annual rate of $69.5 billion. July’s $69.8 billion was the highest since the cycle high $70 billion in March 2012.
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