The Market at 03:35PM ET
Moving the Market
Personal Income: Actual 0.2%, consensus 0.3%, prior 0.3%
Personal Spending: Actual -0.2%, consensus 0.1%, prior 0.5%
PCE Prices - Core: Actual 0.1%, consensus 0.1%, prior 0.1%
Employment Cost Index: Actual 0.7%, consensus 0.5%, prior 0.7%
Chicago PMI: Actual 66.2, consensus 60.0, prior 60.5
Michigan Sentiment - Final: Actual 86.9, consensus 86.4, prior 86.4
The Week in Review: Long Bond Leads as Fed Ends QE
The Week Ahead
- Most maturities gained this week as the Fed ended is historic QE program at Wednesday's FOMC meeting.
- The Fed tapered its bond buying program to zero, but will continue to rollover maturing Treasury securities.
- As the Fed ended its asset purchases the Bank of Japan ramped up theirs to an annual pace of JPY80 trln (JPY50 trln previous).
- Plenty of data topped estimates as GDP-Adv. (3.5% actual v. 3.0% expected), Case-Shiller 20-city Index (5.6% actual v. 5.5% expected), consumer confidence (94.5 actual v. 87.2 expected), Employment Cost Index (0.7% actual v. 0.5% expected), Chicago PMI (66.2 actual v. 60.0 expected), and Michigan Sentiment - Final (86.9 actual v. 86.4 expected) all posted better than expected results.
- Durable orders (-1.3% actual v. 0.6% expected), personal income (0.2% actual v. 0.3% expected), and personal spending (-0.2% actual v. 0.1% expected) fell short of estimates.
- This week's auctions started off average and got worse into and after the FOMC meeting.
- Tuesday's $29 bln 2Y note auction drew 0.425% and a light 3.11x bid/cover. A strong indirect bid (36.6%) provided support as direct bids (16.2%) were light. Primary dealers were stuck with 47.2% of the supply.
- Wednesday's tepid $35 bln 5Y note auction drew 1.567% (WI 1.552%) and a weak 2.36x bid/cover. Indirect (47.8%) and direct (10.5%) bids were a tad light, and left primary dealers with 41.7% of the supply.
- Thursday's $29B 7Y note auction drew 2.018% (WI 2.008%) and a light 2.42x bid/cover. Indirect (46.6%) bids provided support as direct bids (15.4%) fell short of their 12-auction averages. Primary dealers ended up with just 38% of the supply.
- This week's action had the biggest impact up front. The 2Y rallied +10bps to 0.505%. Action held support early in the week and finished Friday's trade near key resistance.
- In the belly, the 5Y climbed +9bps to 1.613%. Resistance in the 1.650% region remains under close watch as the 50, 100, and 200 dma lurk in the vicinity.
- The 10Y added +4bps to 2.335%. Traders continue to monitor resistance in the 2.350% area.
- A flat week at the long end held the 30Y @ 3.060%. The 3.050%/3.100% resistance band remains in focus.
- A flatter curve developed as the 2-10-yr spread narrowed to 183bps and the 5-30-yr spread tightened to 144.5bps.
- Monday's data includes ISM Index, construction spending (10), and auto/truck sales (14). Chicago's Evans makes opening remarks at the "Infrastructure and Economic Growth: Measuring the Impact of Funding Models" conference (9:30) before Dallas' Fisher discusses "Preparing to Normalize Monetary Policy" (12:40).
- Tuesday will see the trade balance (8:30) and factory orders (10) cross the wires.
- Data continues to flow on Wednesday as the weekly MBA Mortgage Index (7), ADP Employment Change (8:15), and ISM Services (10) are due out. Minny's Kocherlakota talks on "Clarifying the Objectives of Monetary Policy" (9:15); Richmond's Lacker discusses "Committing to Financial Stability" (9:30); and Boston's Rosengren takes part in the Ninth High Level Meeting on Global Banking Standards and Regulatory and Supervisory Priorities in the Americas (10).
- Thursday's data is heavy as Challenger Job Cuts (7:30), initial and continuing claims, productivity-prel., and unit labor costs (8:30) are all released. Chicago's Evans makes opening remarks at the "The New International Financial System: Analyzing the Cumulative Impact of Regulatory Reform" conference (10:40) before Fed Governor Powell speaks (TBA); and Cleveland's Mester discusses "Federal Reserve Communications and Forward Guidance" (19:05).
- Friday's data is the most anticipated of the week as nonfarm payrolls, nonfarm private payrolls, unemployment rate, hourly earnings, average workweek (8:30), and consumer credit are all on the calendar. Chicago's Evans makes welcoming remarks at the 10th Annual Community Bankers Symposium (9:15).
Dollar Surges to Best Levels Since June 2010:
- The Dollar Index continues to hold solid gains as trade flirts with its first close above 87.00 since June 2010.
- EURUSD is -80 pips @ 1.2530 as trade contends with its worst close in over two years. The single currency pierced the 1.2500 level for the first time since August 2012, but has regained the mark after an unnamed source hinted the Fed is taking note of the weakness in the single currency. Traders will continue to watch 1.2500 into Monday's Italian and Spanish Manufacturing PMI figures.
- GBPUSD is -5 pips @ 1.6000 as trade continues to test support in the area. Early weakness pushed sterling below 1.5900 for the first time in two weeks, but action now holds near its best levels of the day. A breakdown of 1.5900 will have action at its lowest levels since September 2013. Britain's Manufacturing PMI is due out Monday.
- USDCHF is +60 pips @ .9620 as action nears the October highs. Trade has been whipped around as action remains tightly correlated to the euro.
- USDJPY is +285 pips @ 112.10 as action presses to its best levels since December 2007. The pair has surged amid today's trade after the Bank of Japan increased its bond buying program to an annual pace of JPY80 trln (JPY50 trln previous). Japanese banks are closed Monday for Culture Day.
- AUDUSD is -45 pips @ .8795 after failing to reclaim the important .8850 level. The hard currency broke out above that level earlier in the week, but it proved to be a bull trap that has caught many leaning the wrong way. A move to the lower end of the range near .8650 cannot be ruled out. Australian data scheduled for Sunday evening includes building approvals and ANZ Job Advertisements. China's Manufacturing PMI will be released late tonight while Non-Manufacturing PMI and HSBC Final Manufacturing PMI will cross the wires Sunday evening.
- USDCAD is +95 pips @ 1.1280 as buying developed in response to the Canadian GDP (-0.1% MoM actual v. 0.0% MoM expected) miss. The pair crossed 1.1300 for the first time in two weeks, but has slipped back below the level. Bank of Canada Governor Stephen Poloz will speak Monday in Toronto.
Afternoon Update: 2Y -01/32 @ 99 24/32...3Y -03/32 @ 99 27/32...5Y -06/32 @ 99 14/32...7Y -07/32 @ 99 22/32...10Y -08/32 @ 100 10/32...30Y -11/32 @ 101 04/32...EURUSD -80 pips @ 1.2530...GBPUSD -5 pips @ 1.5995...USDJPY +275 pips @ 112.00...USDCHF +60 pips @ .9620...AUDUSD -35 pips @ .8805...USDCAD +90 pips @ 1.1275
Treasuries Hold Near Lows:
- Treasuries linger near their worst levels of U.S. trade as equity markets hold just off all-time highs.
- Today's weakness has yields across the curve testing key resistance levels.
- Up front, the 2Y is +0.7bps @ 0.497%. Traders continue to monitor the 0.500%/0.520% area for resistance.
- Selling in the belly has the 5Y +4.1bps @ 1.621%. Resistance in the 1.650% area is defended by the 50, 100, and 200 dma.
- The 10Y trades +3.7bps @ 2.342%. The benchmark yield contends with resistance in the 2.350% region.
- At the long end, the 30Y holds +3.9bps @ 3.075%. The 3.100% level remains in focus.
- Selling continues to swing the curve steeper with the 2-10-yr spread trading 184.5bps.
- Precious metals remain under significant pressure as gold trades -$34 @ $1165 and silver sits -$0.51 @ $15.90.
BoJ Stimulus Sends Yen Tumbling to Five Year Lows: The Dollar Index rallied to 87.00 for the first time since mid-2010. The DXY has now rallied 10% since early May as the Fed slowly wound down its buying programs. The move today was assisted by news from Japan after its central bank announced it would further extend its asset purchase program. The DXY was already strong and trading at above 86.00 ahead of the news. But the greenback saw a fresh round of buying at that point that pushed it to its multi-year highs. Mixed economic data did little to deter the strength. Personal income and spending were below expectations and Chicago PMI, Michigan Sentiment and the Employment Cost Index all ran a little above expectations.
- The euro was hammered on the dollar rally. A big miss on German retail sales has offset a slightly higher than expected CPI number. The political infighting between Europeans over monetary policy will be a hot topic ahead of next week's ECB interest rate decision. Mr. Draghi is expected to update markets on its ABS purchases. A hot topic will be if the ECB has discussed purchasing corporate bonds. We would look for Mr. Draghi to admit that it has been discussed but that they are not close to take any action as this remains a heated debate. The rumors ahead of the meeting are already heating up today as there is talk that the EUR3 trl balance sheet Draghi desires is simply not realistic. This would provide some near term support.
- The pound has slipped back below the 1.6000 level in response to the dollar rally. 1.6000 continues to be a key straddle level for sterling.
- The yen fell 2% in response to the Bank of Japan announcement and news that its Government Pension Fund would be allocating a bigger portion of its investment into stocks and out of bonds. The BoJ raised its asset purchase program to JPY80 trl from JPY50 trl and expanded its monetary base to JPY80 trl from JPY60-70 trl. Both moves were expected but the extent of the stimulus was larger than most estimated and the timing of the move caught markets off guard as many expected it later in 2014 or earlier in 2015. The yen is now trading at 112 against the dollar, its lowest level since early 2008.
Data Reaction II:
- Treasuries have rallied off their best levels of the session even as equities remain strong.
- However, some light selling has developed in response to the better than expected Chicago PMI (66.2 actual v. 60.0 expected) and Michigan Sentiment -Final (86.9 actual v. 86.4 expected) data.
- Maturities across the complex remain firmly in the red with yields across the curve +2/+3bps.
- The 10Y hit a high of 2.350% early in the session, but is now hovering in the 2.325% area.
- A slightly steeper curve persists as the 2-10-yr spread trades 183bps.
- Precious metals are ticking off their lows with gold -$31 @ $1167 and silver -$0.46 @ $15.96.
- Treasuries are seeing little response to this morning's data batch.
- Personal income edged up 0.2% (0.3% expected) while spending dipped -0.2% (0.1%) expected.
- The Employment Cost Index climbed 0.7% (0.5% expected) and PCE Price - Core was in-line at 0.1%.
- Early selling has yields across the curve firmer by a couple of bps.
- A +3bp advance has the 10Y @ 2.335%.
- A steeper curve persists as the 2-10-yr spread trades 184bps.
- Precious metals are off their lows with gold -$30 @ $1168 and silver -$0.47 @ $15.95.
- Chicago PMI will cross the wires at 9:45am ET and Michigan Sentiment - Final is due out at 9:55am ET.
- Yields are flat to lower across Europe
- Eurozone CPI Flash Estimate (0.4% YoY) and the unemployment rate (11.5%) both matched expectations
- German Bunds drift little changed despite the big retail sales (-3.2% MoM actual v. -0.8% MoM expected) miss. A flat session has the 10Y holding @ 0.850%.
- UK Gilts are slipping amid an uneventful session. The 10Y is +1bp @ 2.240%
- French OATs are bid in response to the weak consumer spending (-0.8% MoM actual v. -0.3% MoM expected) figure. Modest buying has the 10Y lower by -3bps @ 1.200%.
- Italian BTPs are aggressively bid after the unemployment rate ticked to a record high 12.6%. Today's buying spree has the 10Y down -10bps @ 2.385%.
- Spanish Bonos hold moderate gains. A -7bp drop has the 10Y @ 2.085%, hovering just above all-time lows.
Surprise BOJ Action Drops Yen to Lowest Levels Since January 2008:
- The Dollar Index presses session highs near 88.70 as trade flirts with its best monthly close since February 2009.
- EURUSD is -35 pips @ 1.2575 as trade presses lower for a third day. The weakness in the single currency comes amid a slew of disappointing data as French consumer spending (-0.8% MoM actual v. -0.3% MoM expected) and German retail sales (-3.2% MoM actual v. -0.8% MoM expected) saw sharper than expected declines while eurozone CPI Flash Estimate (0.4% YoY) and the unemployment rate (11.5%) matched expectations. The recent lows near 1.2500 are in focus.
- GBPUSD is flat @ 1.6000 as trade tests support in the area. A lack of news and data has made for an uneventful session with early action holding yesterday's lows. A break below 1.5900 will push sterling to its lowest level since September 2013.
- USDCHF is +35 pips @ .9595 as trade nears a test of the October highs in the .9685 area. Early action has been tightly tied to the euro as news and data out of Switzerland were absent from the calender.
- USDJPY is +245 pips @ 111.70 after the Bank of Japan unexpectedly increase its bond buying program to an annual pace of JPY80 trln (JPY50 trln previous) in a 5-4 vote. The surprise announcement launched the pair to its best levels since January 2008, blowing out stops at the September/October highs near 110.00. Overlooked amid today's madness was an extremely weak household spending (-5.6% YoY actual v. -4.0% YoY expected) print and an in-line Tokyo core CPI (2.5% YoY) reading.
- AUDUSD is -15 pips @ .8825 after paring its early losses. Overnight selling had the hard currency probing the .8800 level, but trade has managed to recoup its losses as risk assets rally. The upper end of the .8650/.8850 range that has been in place for the past month remains in focus. USDCNY was little changed @ 6.1138.
- USDCAD is +10 @ 1.1195 as trade remains on hold into this morning's Canadian GDP figure. The 1.1150 area provides minor support while 1.1100 is home to more meaningful support and the 50 dma.
Treasuries Slip as BOJ Ups Bond Purchases:
- Long dated Treasuries are slipping in early trade after the Bank of Japan unexpectedly increased its bond buying program to an annual pace of JPY80 trln (JPY50 trln previous).
- Overnight ranges were wider than usual, expanding to 7bps in the belly.
- Selling at the long end has the 30Y +2.5bps @ 3.061%. Action tested the 3.100% level before running into resistance.
- The 10Y is +1.5bps @ 2.320%. The overnight weakness has the benchmark yield testing 2.300% resistance.
- In the belly, the 5Y is +0.2bps @ 1.582%. The 1.650% region remains problematic as the 50, 100, and 200 dma lurk in the vicinity.
- Up front, the 2Y holds -1.5bps @ 0.470% after failing at the 0.500% level.
- A steeper curve has taken hold with the 2-10-yr spread widening to 185bps.
- Precious metals remain under pressure with gold -$26 @ $1172 and silver -$0.40 @ $16.02.
- Data: Personal income and spending, PCE Prices - Core, Employment Cost Index (8:30), Chicago PMI (9:45), and Michigan Sentiment - Final (9:55).
Treasuries Eke Out Gains:
- Treasuries booked small gains as steady selling persisted throughout U.S. trade.
- The complex was bid into the cash open amid weakness in Europe and climbed to its best levels of the day in response to the strong Q3 GDP-Adv. (3.5% actual v. 3.0% expected) report.
- Trade chopped around near the highs until U.S. equities began to gain momentum.
- From there, sellers were in charge into early afternoon trade. Maturities tested their breakeven lines shortly after the weak $29 bln 7Y note auction, but were unable to push into negative territory.
- The auction drew 2.018% (WI 2.008%) and a light 2.42x bid/cover. Indirect (46.6%) bids provided support as direct bids (15.4%) fell short of their 12-auction averages. Primary dealers were left with just 38% of the supply.
- A choppy trade developed throughout the afternoon, keeping yields in a tight range.
- Up front, the the 2Y slipped -0.4bps to 0.485%. Most of U.S. action was confined to a tight 2bp range.
- In the belly, the 5Y eased -1.7bps to 1.580%. Early selling ran the yield to a three-week high near 1.620%, but action was unable to pierce resistance in the area guarded by the 50, 100, and 200 dma.
- The 10Y fell -1.8bps to 2.305%. Trade managed to hold the closely watched 2.300% level.
- At the long end, the 30Y shed -1.2bps to 3.036%. The yield threatened to break below 3.000%, but sellers stepped in to defend the level.
- A slightly steeper curve took hold as the 2-10-yr spread narrowed to 182bps.
- Precious metals were hit hard as gold fell -$26 to $1199 and silver slumped -$0.85 to $16.41.
- Data: Personal income and spending, PCE Prices - Core, Employment Cost Index (8:30), Chicago PMI (9:45), and Michigan Sentiment - Final (9:55).
Dollar Holds 86.00:
- The Dollar Index held 86.00 and has seen a bounce back into the 86.15 area.
- EURUSD is -25 pips @ 1.2610 after recouping most of its early losses. The single currency was pressured to below 1.2550 immediately after the strong U.S. GDP print, but quickly recovered. Trade has been under pressure throughout the session after CPI in both Germany and Spain came in light. Eurozone data scheduled for tomorrow includes core CPI Flash Estimate, the unemployment rate, French consumer spending, and German retail sales.
- GBPUSD is -10 pips @ 1.6000 as trade flirts with support in the area. Traders continue to watch this level closely as a breakdown puts the October lows near 1.5900 in jeopardy.
- USDCHF is +15 pips @ .9560 as action fights to hold the flat line. The pair spiked above .9600 in response to the early weakness in the euro, but has surrendered most of the gains.
- USDJPY is +60 pips @ 109.45 as trade contends with its best levels in more than six years. The pair saw a boost in afternoon trade amid reports Japanese pension GPIF was increasing its equity allocation to 25% while lowering its Japan debt allocation to 35%. Traders should be mindful of stops in the 110.00 area as the Bank of Japan opines tonight. Japan's household spending and Tokyo core CPI are due out tonight.
- AUDUSD is +40 pips @ .8835 as trade nears its best levels of the day. Trade pressed to almost .8750 early in the session following the bog let up in import prices, but has moved back towards the upper end of the .8650/.8850 range as risk assets catch a bid. Tonight's Australian data is limited to PPI.
- USDCAD is flat @ 1.1185 as traders await tomorrow's Canadian GDP report.