This Is Not What the Fed Wants to See

lance_HSThe first trading day of the New Year started with a bang! Stock markets around the world sold off. And whenever there is a major scare in stocks, the money flows into the safety of U.S. Treasury bonds.

The yield on the 30-year Treasury bond was over 3.05% last week and quickly moved below 2.95% yesterday morning. A big move, but not as big as in stocks.

I predicted that markets would be volatile in the last couple weeks of the year (and they were) but, I also mentioned to my Treasury Profits Accelerator subscribers that this week will be most important. There are certain economic reports that have been proven to move asset markets such as the NY Fed study, and this week there are two such releases.

Yesterday, the Institute for Supply Management (ISM) released their December manufacturing index. It was expected to improve slightly from the weak reading last month, but actually moved even lower. Energy prices weighed on the report but foreign demand was also very weak.

This is not what the Fed wants to see after raising rates last month.

Between that and the rout in stocks, I’m surprised yields didn’t fall further than they did yesterday, but the markets are really waiting for the December jobs report on Friday – the week’s second release. If that shows continued weakness and no wage growth, look out below! Stocks and bond yields will certainly fall further.

I’ll leave the long-term forecasting to Harry but, other than a low unemployment rate, the economic data going into last month’s rate hike wasn’t great. If we don’t start seeing a major improvement soon, don’t expect the Fed to hike again. Deflation will be a major concern, not just low inflation.

We had a scare in stocks yesterday but as of earlier today, the markets were calmer. Volatility in bonds has diminished as a trading range has developed in the last month. Look for that volatility to increase and a trend to develop in the short-term. Friday’s employment situation will likely set the tone and market direction, at least for the near-term.

Of course, Treasury Profits Accelerator subscribers will welcome the volatility and overreactions in the long-term Treasury bond market that lower stocks will make for us. Those overreactions most always create opportunities for us to profit!

Click here to learn more about this trading system, which capitalizes on these long- and short-term moves in Treasurys.

Lance Gaitan

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Categories: Interest Rates

About Author

Lance Gaitan graduated from Franklin University in Columbus, OH with a degree in Finance. After graduating and working as an auditor for an insurance administrator as a number of years, he attained his securities license. He then went to work as a broker for a small firm and during the mid-1990’s Lance managed the futures trading desk for Piper Jaffray, a large regional brokerage firm based in Minneapolis. After migrating to Florida in early 2000, Lance founded a futures trading firm, GSV Futures, specializing in retail commodity trading strategies. Lance sold that business in 2006 and joined Harry Dent, Jr. and Rodney Johnson at Dent Research shortly thereafter.