Apparently fears of slowing have taken root in the marketplace after a forecast calling for lingering slowing, sent the stock market into a tailspin on Monday. While the markets have doubted the recovery prospects since the early June peak in equity prices, a sharp downside extension in equity prices yesterday seems to have enhanced the fears of slowing even further. Clearly a thin slate of scheduled data over the prior two trading sessions has allowed the bull camp in the Treasury market to fan the talk of slowing. With the trade partially anticipating a potentially supportive statement from the FOMC on Wednesday afternoon, which hints at the prospect of increased Treasury buying efforts, the bull camp would seem to be drawing on at least two different bullish themes. However, while the September Bonds have regained the 116-00 level again and that seems to have rekindled talk of an up trend pattern, the bull camp will have to weather an existing home sales reading this morning and a $40 billion 2 Year Note auction. Unless the Treasury market views the Existing home sales reading as an anomaly this morning, that report should temper some of the existing bullish bias. However, with the culmination of the 2 day FOMC meeting, Durable Goods and New Home sales all due out on Wednesday, the market looks to have a major price decision directly ahead. While we have to leave the edge with the bear camp in a longer term perspective, a number of slack economic forecasts have rekindled near term suspicion toward the recovery and there is also hope of increased Fed buying ahead and that seems to have given the bulls the edge for now.
We have to think that the bias in the market will remain up at least into the FOMC statement on Wednesday afternoon, especially if Durable goods come out negative as predicted by the trade on Wednesday morning. While the trade into the June lows might have been factoring in the prospect of change in the Fed’s rate policies, that seemed premature at the time and if the numbers don’t consistently show positive progression ahead, we doubt that the Fed is going to risk snuffing out the fledgling recovery effort with a premature hiking of rates. In the short term, the bull camp looks to have the edge and that should allow the market to continue to carve out some positive action on the charts. In fact, the charts almost seem to have forged an uptrend channel, with higher highs and higher lows off the June lows.
Given that both Bonds and Notes have maintained a consistent net spec short positioning in the COT reports, there is probably further technical short covering action being mixed into fresh speculative out right buying. Given the anticipation of additional quantitative easing steps from the Fed, we can’t rule out a return to the 118-00 level in September Bonds, especially if the 2 year Note auction later this morning goes off solid.
With the near term bullish bias, we suspect that September Notes have the capacity to rise above the 116-12 level in the coming 36 hours of trade. In conclusion, the Treasury market is seemingly poised to get a quasi perfect storm of near term bullish information, with the majority of the buying potentially seemingly being generated off a “buy the rumor” mentality toward the Fed’s Wednesday afternoon policy statement.