Logic Takes Another Break

While yesterday's FOMC statement was one of the most positive in quite a while, you wouldn’t know it by looking at where the bond market ended.

Dow futures are down slightly in pre-opening trading after another in the long string of dull, listless trading days for stocks. The FOMC statement failed to ignite any desire for stock traders to move off of square one. The bond market did make a move yesterday, but it made the move despite, not because of, the FOMC statement.

In yesterday’s opening commentary I mentioned how the charthead crowd has been focused on the important 1.57% level on the 10-year note; a level traders had been unable to break in either direction for two weeks. The chartheads finally made a break for it yesterday, and that break was for yields to fall.

Most Positive In A While

While the FOMC statement was one of the most positive statements in quite a while, you wouldn’t know it by looking at where the bond market ended. Bond prices ended sharply higher on a day when all logic dictated that prices should have fallen after the FOMC statement. But logic never comes into play when dealing in this bond market and when chart traders are ready to make a move. Bond yields were moving lower before the FOMC meeting for no reason whatsoever, but bond yields did move back up on the statement. That reaction lasted about 30 seconds before the chart trading crowd swooped back in.

Bond prices held those most of those gains overnight, but prices have just turned lower. The bullish speculative crowd seems determined to push yields back to the lows of about three weeks ago, but they will need to drag in other buyers along with them. The way bonds end tomorrow will be an important test to see if bond yields slump back to the historical low yields or if this has been another failed attempt by the chartheads.

As far as the actual FOMC statement itself goes, the Fed did upgrade economic conditions. They noted gains in the job market and made particular note of strength in consumer spending. The Fed also acknowledged that risks to the outlook had diminished. The statement read like one at which the Fed made the case to tighten at that meeting, but of course they did not. The rest of the statement was about gradualism and caution.

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Janet In August

Now traders can wring their hands until August 26. That is the day Janet Yellen will speak at the annual Jackson Hole, WY conclave of some of the world’s top economists and central bankers. She is expected to either hint the Fed will move in September or eliminate that possibility. I can tell you what she will say. She will say whatever the markets dictate between now and August 26.

Weekly Jobless Claims rose by 14k to a still low 266k. Tomorrow’s big release will be the preliminary estimate of second quarter GDP. Despite the fact that everyone knows the preliminary release is worthless and will be no doubt be revised dramatically over the next two months, traders will still freak out for a few minutes at least should the number surprise in one direction or the other. Economists are guessing GDP will come in around +2.5%.

Opening Market Rates

  • 2-year is .73%
  • 5-year is 1.11%
  • 10-year is down 8/32 to yield 1.525%
  • 30-year is off 20/32 to yield 2.24%

Visit Trust.com for more economic commentary.

Dwight Johnston is the chief economist of the California and Nevada Credit Union Leagues and president of Dwight Johnston Economics. He is the author of a popular commentary site and is a frequent speaker at credit union board planning sessions and industry conferences.

July 28, 2016

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