Interest Rates: Technical Bias is Down but the Decline Monday Seems Outsized
While treasury prices have not forged lower lows for the move this morning, they remain just above yesterday's spike lows in a fashion that suggests the charts lean in favor of the bear camp. However, despite the markets capacity to discount the surging infection count over the past 5 trading sessions getting short bonds at current levels in the face of the highest daily infection count of the entire pandemic seems highly suspicious. According to market sentiment the rapid spread of the latest Covid variant is not likely to "derail" several US interest rate hikes this year! In fact, the trade has "pulled forward" expectations for the first interest rate hike but that sentiment will likely be tested by the unemployment report on Friday. Expectations for the December payrolls call for a gain of 400,000 with that reading following a very significant downside miss last month. After maintaining a net spec and fund short positioning from February 2020 until early December, the specs and funds even added to their net long bonds last week and that likely added to the significant washout yesterday. Going forward the trade appears to have "priced in" straight away ongoing growth despite the highly uncertain impact of the current Covid-19 infection surge. On the other hand, inflation fears have moderated over the past several weeks! The Commitments of Traders report for the week ending December 28th showed Bonds Non-Commercial & Non-Reportable traders are net long 8,173 contracts after net buying 5,897 contracts. For T-Notes Non-Commercial & Non-Reportable traders reduced their net short position by 86,098 contracts to a net short 416,527 contracts. The North American session will start out with a private monthly survey of same-store sales, followed by the November Canadian industrial product price index (IPPI) which is forecast to have a moderate downtick from October's 1.3% reading. The December Markit Canadian manufacturing PMI is expected to have a modest uptick from the previous 57.2 reading. The December ISM manufacturing index is forecast to have a modest downtick from November's 61.1 reading. The November job openings and labor turnover (JOLTS) survey is expected to have a minimal uptick from October's 11.033 reading.
TODAY'S MARKET IDEAS
Obviously, the treasury markets are short-term technically oversold and in the case of March bonds prices at least initially have rejected the key spike lows forged back in late November. In our opinion, the breakout yesterday was out of context and much larger than justified. However, ultimately treasury yields should be working higher from historically low levels and yesterday's washout seemed to be off "longer-term" fundamentals. Key support in March bonds is seen at 157-16 and then again down at 157-12. Similar support in March Notes is seen down at 129-00.
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