RATES: Selling the Rumor of the Fed to Continue for 18 Hours
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On one hand, there is a very long list of forces likely to entrench the downtrend in Treasuries in the coming months. On the other hand, signs of softening data are surfacing around the globe, with primary concerns centered on Europe and China. However, US data is also showing a loss of momentum but given signs of moderating inflation, rising rate headwinds, periodic anxiety flowing from equities and consumer confidence eroding traders should brace for temporary technical and fundamental recovery action. According to a respected bond market analyst, the potential for the Fed to protect its institutional reputation as an inflation fighting central bank, increases the chances the Fed will overreact which in turn could increase the odds of recession. While the markets are heavily focused on the US rate hike decision tomorrow, traders should not ignore the next US refunding announcement which could increase auction supply in an environment where recent demand for auction supply has softened. Fortunately for the bull camp, further price weakness from current levels will offer relatively attractive yields, which could attractive buyers given deterioration in equity market sentiment and recent harsh declines in equity prices. In the coming 24 hours the bond and note markets could experience temporary knee-jerk reaction declines and possibly forge fresh contract lows, but once the FOMC action is past, that could prompt short covering and a measure of fresh speculative/bargain-hunting buying. The North American session will start out with a weekly private survey of same-store sales followed by March factory orders which are expected to have a moderate uptick from February's -0.5% reading. The March job openings and labor turnover (JOLTS) survey is forecast to have a modest uptick from February's 11.266 million reading.
MARKET IDEAS
While we will not rule out a spike down breakout in bonds and a temporary downside extension in treasury notes and bonds, we suggest aggressive traders begin to speculate on an interim but temporary low! However, in addition to the widely anticipated 50 basis point rate hike tomorrow do not be surprised if Fed dialogue offers additional selling incentives as the Fed attempts to use “moral suasion” (jawboning) to battle inflation psychology.