Chinese currency devaluation had quickly grabbed almost every available top news headline by yesterday evening.  Yet while the rest of the world was just beginning to hear about it, financial markets were already moving to the next act in the play.  Irony will run deep this weekend when all of the arm-chair market mavens engage their social circles in seemingly witty banter on the current state of affairs whereby "China has unpegged its currency from the dollar and is now in freefall."

It's ironic because that was the news on Tuesday.  China didn't even make it through Wednesday before its central bank opened the chute, effectively promising that any further falling will be slower and more controlled. 

That's not really a surprise considering the fervor with which global markets dumped Yuan.  The whole thing was fairly farcical to begin with.  Under the auspices of setting the currency free to take its course, Chinese officials continued to impose a 2% daily limit on upward or downward movement. 

I'm no currency expert and I don't know of any who speak English that I can understand, but I do know that the 2% limit is incongruous with the notion of a free market.  China either needs to say it wants to devalue its currency or that it wants to get out of the manipulation game altogether.  By trying to have their cake (i.e. showing their critics steps toward ending the manipulation) and eating it too (getting the devaluation that they really want), they create a dangerous situation where markets will grow increasingly more pent-up with the desire to sell the unsellable currency. 

This creates two big problems.  As long as China keeps taunting markets with lower currency valuation potential only to step in and prevent true selling, markets will continue to read that as an act of desperation and cause for concern over the true state of China's economy.  The secondary, tangential problem is that the more pent-up markets become, the more vicious the intent to sell when it's available.  Consequently, China won't be able to step away in a true free-market sense any time soon (because the more vicious the intent to sell, the more China has to step in and halt the selling).

So markets realized yesterday that the only way Yuan will depreciate will be however damn well China wants it to.  Bummer for Treasuries, because they had been thriving on the uncertainty created by the absence of Chinese currency intervention.  As soon as the intervention was back on, Treasury yields were back up (and MBS prices back down). 

From here on out, we're going to need corroboration of global growth concerns from things like economic data (at home or abroad).  It just so happens we have the reasonably relevant Retail Sales data this morning.  It's not necessarily destined to be a market mover, but to whatever extent the China-related concerns have primed the pump for more serious global growth concerns, an exceptionally negative result on data like this could keep the good times rolling.  Conversely, a positive reaction to a negative result would really let us know that rates just found bottom (for now).