Thoughts Of The Price Action

The market has not changed its mind. Following Brainard’s comments yesterday the market had downgraded the chances, which were already modest, of a Fed hike next week. The September Fed funds futures is unchanged on the day. The implied yield of 41 bp matches the 50-day moving average.  

Maybe the suggestion that 25 bp hike in the target range somehow would make the Federal Reserve imprudent, incautious or impatient is a bit much. Without expectations changing the US 2-year yield is near 80 bp. It is eight basis points above its 50-day moving average. The 10-year yield is poking through 1.70%, which is about 18 bp above the 50-day moving average.  

It is premature to make a hard conclusion. However, investors should be open to the possibility the sell-off in asset prices in the US, and especially the backing up of US interest rates and the steepening of the yields curve may be a protest against such easy monetary policy in the US. That hypothesis seems to be a corollary to the idea that monetary policy in Japan and Europe is maxed out, if not in terms of the lowest rates can go into the phantom-zone below zero and amount of assets that can be bought, then as a function of the political will of policymakers.  

The sharp backing up in yields is not just a function of the US. European benchmark 10-year yields are mostly up 3-5 bp today and 20-25 bp over the past week. The German 10-year yield is at seven bp, the highest since Brexit; two months ago it was near minus 30 bp. The rising bond yields in Europe not only reduce the amount of negative yielding securities but also increases the universe of assets the ECB can buy.  

The 10-year JGB has trailed a bit. It too was near minus 30 bp in July, but it has only managed to near zero. The 20-year JGB had almost no yield two months ago, and it is near 50 bp now.  

The US Dollar Index has been steadily moving higher. We continue to monitor a uptrend line drawn off the April, June and August lows, which caught the September low as well. It comes in near 95.55. Yesterday and today have been about consolidation. The US Dollar Index is trading today within yesterday’s range, which was within last Friday’s range. A move above 95.60 is needed to signal another run at 96.00-96.25.