Yesterday weaker stock prices gave bonds the buy signal (wave em in)...today the opposite is occurring as stocks bounce off a familiar support level. After testing 10 day lows, 992 S&P support has held and now trader's are doing a "return to status" quo dance...leaving the market essentially flat heading into the release of the much anticipated FOMC statement. Seeee....
This has resulted in some selling of TSY note futures...AHHHHHHH!!!!!
Which is pushing prices of the "rate sheet influential" FN 4.5....LOWER. We noted some chunky selling of FN 5.0s this morning, other than that one transaction prices of "rate sheet influential" MBS coupons are taking their directional guidance from the leadership of the yield curve. All square before the action begins at 1pm.
If the selling is scaring you....dont fret....this too is a return to STATUS QUO!!! Seeeeeeeee....
This return to status quo really illustrates the market's bias to "WAIT AND SEE"....
From October 08 to March 09 equity markets priced in the possibility of systematic failure and depression....since hitting March lows, economic data has implied that the "worst case" scenario has been avoided and a stabilization was indeed occurring.
More recently, this theme has been seemingly confirmed(depends on who you ask)...because of this the market has returned equity prices to where they were in late Sept. 2008 before all hell broke loose in October...STATUS QUO. This implies the previous month's price action was nothing more than a corrective rally and that previous equity market price action does not necessarily illustrate forward looking optimism...
I think I have made it quite clear that we believe the economy will undergo a long period of stagnate growth as job creation slows while companies struggle to generate adequate cash flows from core business models. Housing will remain weak as consumers repair credit and rebuild wealth...
That said...going forward, markets should begin to more closely examine the extent to which they have priced in a "correction" and consider whether or not companies will be able to generate stable revenues while the labor market is weak and consumers are attempting to recover lost savings and wealth. We should see market participants attempting to place a present value on future cash flows. Unfortunately that task with be muddled with unknowns as the economic outlook has several volatile variables...expect trading to reflect that sentiment. Expect volatility to continue to govern the marketplace. In the near term we are waiting for the S&P to break 990 with conviction....any day now...tick tock tick tock...WAIT AND SEE!
Last night I asked for your input on what the FOMC might say today....didnt get much feedback, but there is still time! Here is the June Statement...
"Information received since the Federal Open Market Committee met in April suggests that the pace of economic contraction is slowing. Conditions in financial markets have generally improved in recent months. Household spending has shown further signs of stabilizing but remains constrained by ongoing job losses, lower housing wealth, and tight credit. Businesses are cutting back on fixed investment and staffing but appear to be making progress in bringing inventory stocks into better alignment with sales. Although economic activity is likely to remain weak for a time, the Committee continues to anticipate that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will contribute to a gradual resumption of sustainable economic growth in a context of price stability.
The prices of energy and other commodities have risen of late. However, substantial resource slack is likely to dampen cost pressures, and the Committee expects that inflation will remain subdued for some time.
In these circumstances, the Federal Reserve will employ all available tools to promote economic recovery and to preserve price stability. The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period. As previously announced, to provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve will purchase a total of up to $1.25 trillion of agency mortgage-backed securities and up to $200 billion of agency debt by the end of the year. In addition, the Federal Reserve will buy up to $300 billion of Treasury securities by autumn. The Committee will continue to evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook and conditions in financial markets. The Federal Reserve is monitoring the size and composition of its balance sheet and will make adjustments to its credit and liquidity programs as warranted."
We anticipate maybe we get some added verbiage on commercial real estate, however we do not anticipate the Fed to stir the pot too much. The Fed is not expected to extend the TSY purchase program...no surprises there as they lost control of the long end of the curve in May. Shouldnt be much alteration to the fed funds rate at exceptionally low levels for an "extended period" text either.
What do you think they need to discuss?
PS If TSY prices move lower a reprice for the worse may hit your inbox.
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