Following futures positions of non-commercials are as of September 25, 2018.

10-year note: Currently net short 756.3k, up 71.6k.

Markets versus the Fed.

Odds of a collision next year continue to rise.  Post-FOMC meeting this week, the dot plot kept its forecast of one more hike this year and three in 2019.  There are two more meetings left this year – November (7-8) and December (18-19).  In the futures market, a December hike is increasingly being priced in, with 80-percent odds, although they fell six percentage points after this week’s meeting.  Next year, markets only expect one 25-basis-point hike.

If the dot plot is right, by the end of next year the fed funds rate will be in a range of 300 and 325 basis points, which historically is not that crazy high, but given where rates were post-financial crisis they would have come a long way.  Before the Fed began raising in December 2015, rates were left between zero and 25 basis points for seven long years.  This has obviously caused a buildup in leverage, particularly sovereign and corporate.  A rise in interest payments will bite.

Then, there is the 10-year Treasury rate (3.06 percent).  Fundamentally (due to lesser foreign demand for Treasury securities, rising federal budget deficit, planned reduction in the Fed’s Treasury holdings, etc.), there is a lot to argue for much higher yields on the long end.  But the 10-year cannot convincingly get past 3.1 percent.  There are bids under these notes (more on this here).  If the fed funds rate continues to rise, and two-year T-yields follow, it does not take too long before the yield curve inverts.  The spread between the two currently stands at 24 basis points.  The Fed is between a rock and a hard place.

30-year bond: Currently net short 103k, up 36k.

Major economic releases next week are as follows.

The ISM manufacturing index for September comes out Monday.  Manufacturing activity increased 3.2 points month-over-month in August to 61.3.  This was the highest since 61.4 in May 2004.

Wednesday brings September’s ISM non-manufacturing index.  Services activity in July rose 2.8 points m/m to 58.5.  January’s 59.5 was the highest ever (data only goes back to January 2008).

Revised durable goods data for August is on tap Thursday.  The advance report showed orders for non-defense capital goods ex-aircraft – proxy for business capex plans – rose 7.5 percent year-over-year to a seasonally adjusted annual rate of $69.5 billion.  July’s $69.8 billion was the highest since the cycle high $70 billion in March 2012.