Friday, September 01, 2006

Almost on cue...

Now the 10-year is flat on the day, so it seems that indeed the early morning sell off was nothing but a head fake.

I'm liking David Andrew Taylor (of the excellent forex blog Dismally) more and more all the time, mainly because he seems to agree with me. Anyway, he comments today that "if you are one of those that feels there is going to be no recession, you're dead on right..... up until the point where the Fed is forced to make it happen."

Now, I'm not a big fan of Keynesian thinking (which he has mentioned as his economic alma mater), but no matter how you look at it, the Fed is quite capable of creating a recession by hiking rates further from here. And as I've said over and over, they have no qualms about doing so. I'd argue that the persistent job growth we've seen isn't the lynch pin that David claims it is, rather the persistence in trimmed-mean CPI. (Macroblog had a great post about the inflation issue today.) Regardless, reasonable men may differ, but in this case we're coming to the same conclusion. Another rate hike(s) are more likely than the market suspects.

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T said...

I just happened across your blog and enjoyed reading several of your recent posts. I agree that we may see more interest hikes as the economy is not stalling and the price of oil drifts lower, thus adding more zest to growth prospects. I am interested in your thoughts about the spread between investment and junk at this stage. Too narrow in my view to justify added risks. I recently started a blog which you may find interesting. You can get to it through T.

steve feiss said...
This comment has been removed by a blog administrator.
steve feiss said...

Tom, think the key here to what you've said today is that another hike may be more likely than is currently priced into the Treasury market ... Truth be known that on the other side of a long weekend, we're lower in price, but oddly enough (or NOT depending upon yer position) the longer end of the curve is what has led us down to start the week. Point is decisions about another tightening are NOT typically made or seen out in the Land Of The Big 01s ... Your stance from earlier post (duration neutral steepening) seems to make most sense BUT here's where I might differ (and hopefully you'll think I'm reasonable at the end of this) ... Perhaps the news over night was too much for the Treasury market to bear .. Weak JGB auction followed by weak long Gilt auction, corporate and CMBS supply talk is all the rage, and the fact that we made it to the other side of a long weekend without any 'incidents' to speak of .. ALSO, when we all fired up our Bloomberg battle stations, we were greeted by news of a huge new reserve of oil, making it all the more likely that Big Earl is NOT gonna play spoiler. At least not for now. Finally while there is a bit of curve steepening going on, which we are in as well with our client-base (we are interest rate strategists and cover institutional fixed income money managers as well as proprietary trading desks here in the U.S. as well as in Germany and the U.K.) we think much of this comes from a great trade (curve flattener) that is simply a bit over extended. CoTr data (included picture) indicates these guys got somewhat less short 2s but by and large have much of the trade on and think this remains one of the bigger 'risks' out there ... Could come undone at any time, adding even MORE of a bid to the Treasury complex (pricing in even less chance of tightening than is currently priced in) which would bring the front end to even more 'rich' levels ... in hindsight, levels that would NOT have seemed rich in the first place IF one thought Fed was done and perhaps next move (sometime well into next year?) was to be an ease ...

On THAT note, I wanted to make sure you saw some very interesting reading (NYTimes from weekend had excellent debate and couple different opinions, David Rosenberg of ML -- talking about inverted yld curves bringing recession -- and in HIS note, he mentions NY Fed item on the topic as well as Caroline Baum/Bloomy article that reads very much the same -- BOTH of which I've attempted to attach) ...

Again, hope you'll consider me a reasonable man as I'm NOT picking apart your thought of further rate-hikes, simply pointing out that there was some 'other news' that has led mkt a bit lower on the flip-side of a long weekend ... I do however disagree with thought of another rate hike NOT the fact that the market has been (and to some degree still IS) priced a little too close to perfection ... for now WE are maintaining core steepening trades as well as longs vs Eurozone short end (for spread compression) and outright look to be more tactical -- looking @ 200day moving avg on 10s closer to 4.80 and then some deeper sponsorship around 4.85-90ish, leaning on seasonals as continuing to be very positive for Treasuries ... Hope you enjoy little extra reading as much as I've been enjoying your work here in this blog ... Regards, Steve

ps IF links above dont work, i'd be happy to email you directly ... you can find me up on Bloomberg ... just let me know

Accrued Interest said...


Love your comment. I will write a full post giving my take on your argument later today.

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