[[wysiwyg_imageupload:1887:]]By Levente Mady
The bond market traded with a bullish tone early in the week, but could not break through resistance. As a result it settled back into the middle of the recent trading range and looks content to continue to chop sideways. The roaring commodity markets have certainly had a muted impact on bonds as the market appears to believe Ben Bernanke’s remarks that the upheaval in oil, silver, cotton, etc. should be just a temporary blip. Last I checked, the Fed had a less than perfect track record predicting market impacts. I am not sure if we should expect a higher success rate this time.
Last week we had the Bank of Canada announcing its policy directive on Tuesday. As expected, the Bank kept its overnight rate at 1%, and as expected (by yours truly) they did indicate a strong preference to postponing rate actions as long as the Canadian Dollar continues to climb and inflation remains contained. Federal Reserve Chief Bernanke said pretty much the same thing about monetary policy down south in front of Congress and the Senate also. The Zero Percent Interest Rate Policy that the markets have enjoyed since late 2008 is here to stay for an extended period of time. My take remains that the Fed has run an asymmetric policy for decades now, so the shock will be if they actually hinted at hiking rates before they absolutely had to. But before rate hike discussions can even be considered, they need to wrap up their Quantitative Easing program first. In spite of the improved economic numbers, that does not seem to be a high priority at the moment either as Chief Ben re-iterated his commitment to following through with the current QEII program through June of this year. In the mean time, the European Central Bankers decided to take a more hawkish tone. Some of the members of the Bank of England’s policy committee have publicly voiced their concerns about commodity driven inflation, while the ECB pretty much told us that they plan to raise their policy rate from 1% next month.
NOTEWORTHY: The economic calendar was busy over the past week. Personal Income popped 1% in January due to tax cuts that took effect at the beginning of the year. Ex tax cuts, Personal Income was pretty much flat. Personal Spending increased marginally (0.2%) during the same period. The ISM surveys continue to point to good times ahead. Some of the regional indexes – such as the Chicago sub index - are now breaking through the sky high 70 threshold. Manufacturing ISM improved close to another point to 61.4, while the Services sector ISM climbed 3 ticks to 59.7. Weekly Initial Jobless Claims decreased 20k to 368k – its lowest level in close to 3 years. The Unemployment report was mixed. The Payrolls figure was in line with expectations at an increase of 192k. The positive development was the upward revisions of 58k to the previous months’ data. Also positive was the decline of the Unemployment rate from 9 to 8.9%, although that was pretty much again powered by a declining work force. The bad news was on the other fronts: weekly hourly earnings were flat and the work week was also unchanged at 34.2 hours. There are certainly no inflationary pressures on the wage front for now. In Canada, our current account continues to struggle with the loonie above par. The deficit on that front amounted to an above consensus $11.0 Billion during the last quarter of 2010. Canadian GDP was slightly better than expected at 0.5% for December, bringing the calendar year growth to 3.2% for 2010. This week’s economic schedule will include data on consumer credit, the trade balance and retail sales.
INFLUENCES: Our trader sentiment surveys moved up last week. On a scale of 0-10, the surveys were up a half point to the 4.0 level, which is moving back to neutral. The Commitment of Traders report showed that Commercial traders were net long 256k 10 year Treasury Note futures equivalents – which is a decrease of 84k. This metric is marginally bullish. Seasonal influences are decidedly negative for the next 2 months. The technical picture remains muddy, as the bond futures managed to rally to the top of the recent narrow trading range between 118 and 122, but got knocked back forcefully. We are neutral heading into next week. A convincing break through the 122 level will just have to wait a bit longer.
RATES: The US Long Bond future decreased 1 point to 119-07 (on the new June contract), while the yield on the US 10-year note rose 8 basis points to 3.49% last week. The Canadian 10 year yield increased 4 basis points to 3.33%. The Canada-US 10 year spread moved 4 basis points in Canada’s favour to 16 basis points. The US 10 year yield is trading 12 bps higher than the Canadian 10 Year yield. The US yield curve was steeper, with the difference between the 2 year and 10 year Treasury yield out 19 bps to 289.
BOTTOM LINE: Bond yields were higher last week, while the yield curve moved steeper. The fundamental backdrop looks supportive. Trader sentiment is moving back to neutral; the Commitment of Traders data is slightly supportive, while seasonal influences will remain negative for a while. I am neutral on the bond market until we convincingly break out of the recent trading range. The market is oversold, the yield curve is ultra steep and the Fed continues to buy bonds by the truckloads. In spite of all this external support, the market remains trapped in a range. Bonds are cheap, but it appears that the excess liquidity still loves the risk trade even with the increasing unrest in the Middle East and North Africa.
Levente Mady 604 646 2088 Lmady @ union-securites.com
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