In a poll taken after this morning's payroll report, 15 of 24 primary dealers (those that deal directly with the Fed) predicted a 50 basis point rate cut and the remaining nine predicted a 25 basis point cut. The sharp drops in the October NAPM and employment reports raise the possibility of a 50 basis point cut, but the question is how much of this weakness was factored into the Fed's thinking when policymakers cut rates by a cumuluate 100 basis points following the Sept. 11 attacks. Click here for the latest list of the primary dealers.
There are several causes of the latest drop in the bond market. First, there are continued reports of profit-taking in the cash bond by end-users who were fortunate to be long the bond. As evidence, note that the bond basis has fallen about 30/32 today. Second, there's a sense in the market that the weak NAPM and employment data increases the odds of a large fiscal stimulus plan. Third, there's talk of a story on Market News by a noted Fed reporter who opines that the jobs report does not justify a 50 basis point cut. Fourth, during the runup, mortgage-backed portfolios were likely big buyers of Treasuries. The sudden reversal is likely causing these portfolios to shed some of their convexity hedges. Fifth, portfolio managers who bought bonds out of fear of underperforming their benchmarks are likely trimming their positions. Sixth, failure to close below 1998's low closing yields after piercing those levels yesterday consitutes a double-top and has sparked technical selling. Seventh, technical indicators point to severe overbought conditions; the call/put ratio is at its highest level in at least 40 months, and RSI's started the day in deep overbought territory. Eight, the failure to rally on weak economic news is a red flag and suggests that a large amount of bearish news is already factored into prices. Ninth, Paul McCaulley at Pimco said today that the big bull market in Treasuries is about over.
Crude oil prices dropped below $20/barrel on the New York Mercantile Exchange for the first time since July 1999 today as Thursday's NAPM report and today's employment report added to concerns about slowing demand. The December crude contract has fallen nearly 2% today and is down 9% on the week despite a growing sense that OPEC will cut production by 1 million barrels. While there is some speculation that profit-taking ahead of the weekend could push the contract back above $20 later on, a close below that key psychological level would likely signal a continuation of the downtrend. The drop in crude has led the CRB commodity index lower by about 0.2% to 186.21, as the index continues to hold above the July 1999 low of 182.67. |
