Following futures positions of non-commercials are as of February 27, 2018.
10-year note: Currently net short 342.9k, up 128.4k.
10-year note: Currently net short -295,359 (Options & Futs).
On February 5 when Jerome Powell took over as Fed chair the S&P 500 large cap index dropped 4.1 percent, and 10-year Treasury yields fell six basis points to 2.79 percent. In all probability, the rout in stocks in that session was a mere coincidence.
On Tuesday this week, Mr. Powell delivered his Humphrey Hawkins testimony to the Congress. The S&P 500 dropped again, down 1.3 percent, but 10-year yields this time around jumped five basis points to 2.91 percent. This probably was not a coincidence.
Markets took “My personal outlook for the economy has strengthened since December” to mean that he was leaning more hawkish than expected, suggesting four 25-basis-point hikes in the fed funds rate this year. Thursday, he tried to walk it back saying “there is no evidence the economy is currently overheating” but investor nerves were not soothed.
A four-hike scenario would represent an acceleration in the pace of tightening.
Since December 2015 when the Fed began raising rates, there have only been five hikes. As of last December, the FOMC dot plot expected three hikes this year. The members will update their forecast in the March 20-21 meeting.
Further, the Fed is also reducing its mammoth $4.4-trillion balance sheet, which got off the ground with $10 billion a month in October-December last year, then accelerating the pace every three months. By this October, this could rise to $50 billion a month. In due course, this can begin to bite, more so if short rates rise faster. Hence the nervous markets. They will be on pins and needles until at least the March meeting.
In the meantime, non-commercials continue to bet on higher 10-year yields.
30-year bond: Currently net long 27.5k, up 10.1k.
30-year bond: Currently net long 23,624 (Options & Futs).
Major economic releases next week are as follows.
February’s ISM non-manufacturing index will be published Monday. Services activity expanded 3.9 points month-over-month in January to record 59.9 (data only goes back to January 2008.)
January’s revised and more detailed estimates of durable goods data are due out Tuesday. Preliminarily, orders for non-defense capital goods ex-aircraft – proxy for business capex plans – rose 6.3 percent year-over-year to a seasonally adjusted annual rate of $66.7 billion – slower than 9.9-percent growth last October. Orders peaked at $70.3 billion in September 2014 and bottomed at $59.9 billion in May 2016.
Wednesday brings revised productivity data for 4Q17. The preliminary estimate showed non-farm output per hour rose 1.06 percent y/y in 4Q17. This was the slowest pace in four quarters. Productivity remains anemic.
Employment numbers for February will be reported Friday. Average hourly earnings of private-sector employees rose 2.89 percent y/y in January – the highest growth rate since May 2009. The last time earnings grew with a three handle was in April that year.
Crude oil: Currently net long 787.1k, up 13.5k.
Crude oil: Currently net long 91,667 (Options & Futs).
Resistance at $63-$64 on the cash ($61.25/barrel) proved tough to conquer. After Monday’s rejection, West Texas Intermediate crude proceeded to lose the 50-day moving average Wednesday. There is decent support at $58-59/barrel, which was defended in the selloff last month.
The EIA report for the week ended February 23 offered no help to the bulls.
U.S. crude production rose another 13,000 barrels per day to 10.3 million b/d. Ditto with crude imports, which increased 261,000 b/d to 7.3 mb/d. As did crude and gasoline stocks, up three million barrels and 2.5 million barrels to 423.5 million barrels and 251.8 million barrels, respectively. Gasoline stocks are at a one-year high.
Refinery utilization dropped three-tenths of a percentage point to 87.8 percent. Utilization has been under pressure since peaking at 96.7 percent late December last year.
Distillate stocks, on the other hand, fell 960,000 barrels to 138 million barrels.
E-mini S&P 500: Currently net long 96.3k, down 17k.
E-mini S&P 500: Currently net long 95,714 (Options & Futs).
On the monthly chart, after January’s solid start to the year, February produced a hanging man on the cash (2691.25). This is potentially bearish medium term, and could form as an opportunity for the bears. Let us see how far they can take it. (All major U.S. indices carved out a monthly hanging man in February.)
During the week, the S&P 500 index retreated after hitting 2789.15 intraday Tuesday – a lower high versus the all-time high of 2872.87 on January 26. The 50-day (2736), which was lost Wednesday, attracted more sellers Thursday. The 200-day, which was defended in the selloff last month, lies at 2561.
At least until Wednesday, the weakness elicited inflows. In the week ended that session, SPY (SPDR S&P 500 ETF) took in $6.2 billion:
IVV (iShares core S&P 500 ETF) $1.3 billion:
VOO (Vanguard S&P 500 ETF) $483 million (courtesy of ETF.com).