Rates: Pushed Into the Market We'd Buy Tests of Last Week's Lows
March treasury bonds enter the Federal Reserve dominated session two points above the recent low and 21/4 points below the recent high. The last COT positioning report showed a net spec and fund short in bonds of 58,019 contracts, which combined with the break after the report puts the net spec and fund short near the largest levels since the beginning of November. Therefore, the market could see extensive short covering buying especially if the Fed surprises with a less than hawkish statement. In our opinion, the primary focus of the trade today will be the dialogue around the potential for a March rate hike. Certainly, there could be surprise news on the tapering front, with guidance on the number of rate-hikes this year, less likely to be seen. In our opinion, the trade has not focused much on the ongoing uncertainty from the pandemic especially with the US reporting 1.1 million infections on Monday! Furthermore, economic data over the past two months has obviously slowed with recent classic inflation readings also slowing their rate of ascent. In other words, without interest rates and Fed policy at extreme liquidity levels and the Fed desiring to "normalize" policy they would probably not be overtly hawkish today. In our opinion, today's US scheduled data will be of little importance, with equity market action likely to be discounted, unless another large washout is seen.
The North American session will start out with a weekly private survey of mortgage applications, followed by the December goods trade balance which is expected to show a modest decline from November's $97.8 billion monthly deficit. December wholesale inventories are forecast to have a minimal uptick from November's 1.2% reading. December new home sales are expected to have a moderate uptick from November's 744,000 annualized rate. The Bank of Canada's latest monetary policy meeting is not expected to have any changes to Canadian rates or policy. The highlight for global markets will come during afternoon US trading hours with the result of the latest Federal Open Market Committee (FOMC) meeting. While trade forecasts do not anticipate a change in rates, post-meeting statements and comments from Fed Chair Powell should reaffirm the Fed's tapering process and signal a Fed rate hike in March.
TODAY'S MARKET IDEAS
The trade is largely anticipating the US Federal Reserve to provide some hawkish headlines and therefore to provide treasuries with the lift today will likely require equal measures of concern for the pace of the economy and concerns of inflation. While the Fed likes to telegraph timing ahead of future moves, we think projecting a March hike is unnecessary and unwise at this point and could prove to be in error if data continues to tail off. Nonetheless, the risk of inflation not the risk of renewed slowing seems to be the focus of the Fed and the markets. In our opinion, we expect to see prices slide following the statement and recover later today or later this week, with very strong value in March bonds seen at 154-08. We see similar strong support in March Notes at 127-19.
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