What Happened Last Week?
Bonds Circle Wagons as Fed Day LoomsLast week was a bit of a barn burner for the bond market with 10-year yields falling at their fastest pace since the start of the pandemic. It was not too troubling to see the modest weakness creep in on Friday. This could be explained by something as simple as traders exiting shorter-term long positions in an attempt to get neutral for next week’s big-ticket events. Chief among those will be Wednesday’s Fed Announcement (which includes updated economic projections and “dots”).
What’s on the Agenda for this Week?
The three areas that have the greatest ability to impact backend pricing this week are: (1) The Talking Fed, (2) Domestic Flavor and (3) Geopolitical.
(1) The Talking Fed: The Federal Reserve Open Market Committee (FOMC) will begin two days of meetings on Tuesday that will culminate with their Interest Rate Decision and Policy Statement on Wednesday at 2:00. While there is no chance of a change in their Fed Funds Rate, the market is very much on edge to see if the policy language shifts to a more “hawkish” tone which may include discussion about a “taper” (reducing the amount of their monthly Treasury and MBS purchases) or a “twist” (keeping the same level of purchases but shifting those dollars to shorter term or longer term instruments). This remains a lower probability though as the Fed has been quite clear that they are not near the point of adjusting their QE program. The market is focused on if at least the discussion is beginning (publicly) around tapering though. Also, as mentioned, this is one of the meetings where they set their Economic Projections (the famous “dot plot chart”). Bonds will be very reactive to changes in the “groupings” of dots for inflation and rates.
(2) Domestic Flavor: There will be some key data on Tuesday which includes Retail Sales and another important inflationary measure, PPI.
(3) Geopolitical: Congress is back in full session this week and markets are keen on what (if anything) can actually make it out of the House or Senate as both Schumer and Pelosi have announced that they will scrap waiting on any bi-partisan agreements and move forward with their proposals.
There were no domestic events today.
On Deck for Tomorrow: PPI, Retail Sales, Empire Manufacturing, Industrial Production and Capacity Utilization, Home Builders Index, 20 year Treasury bond auction, FOMC starts two days of meetings.