Saturday, December 16, 2006


So CPI comes out flat, below the Bloomberg survey of +0.2%. Core also flat. Take that, plus the fact that the market had been off sharply earlier in the week, and you knew a big rally was in the works. So the 10-year up 3/4 and the bond up over a point seemed about right to me.

Then something strange happened. The rally started to lose steam. By mid afternoon, the 10-year was only up 3/8 on the day. By 4PM, the 10-year was flat on the day. WTF? How does such a weak CPI print turn into an unch market?

The explanation I heard from dealer desks was weakness in European and Japanese bond markets. Seems kind of odd to me that Tokyo and Frankfurt would take the U.S. market lower during the late afternoon New York time. That means the sell off would have started around 8PM in Europe and like 3AM in Japan. Activity in those areas would be well known to U.S. Treasury traders before 8:30 New York time.

Anyway, I think it may be that PM's were all so anxious to buy on weakness earlier in the week, that by the time we actually got some bullish data, there was no one left to buy. Its a very bearish signal.


Anonymous said...

Also bond market tends to always fade inflation data up or down. The market has always been more sensitive to growth data like retail sales and especially right now housing.

Bond market is sniffing out that the housing market is bottoming.

Even Bill Gross is smart enough to realize that all-time highs in the Dow lowers recession odds.

Accrued Interest said...

I hear ya. I've been aruging for a while that the market has discounted too many Fed cuts. But it just struck me as odd that the market would change its mind in the middle of the day like that.

I think we might be seeing the effect of low volume as well.

Q1 said...

the bunds started falling at about 3pm London time so the European market idea sounds reasonable to me. Bunds are now down something like 10 or 11 days in a row. Somebody's gonna be feeling that, right?

Accrued Interest said...

Well, here is what's weird about that. If there is negative news in Europe, by the time the U.S. market opens, its already well known.

I guess what I'm trying to say is, while it may be true that Europe lead the down turn, I think the better explanation may be that we were dealing with light volume here in the U.S., and once all the prop traders had pushed our market higher, there was no one to follow through. Maybe U.S. traders were assuming their would be buying coming out of London that never happened.