Following futures positions of non-commercials are as of August 28, 2018.
10-year note: Currently net short 529.8k, down 170.7k.
July’s core PCE (personal consumption expenditures) – the Fed’s favorite measure of consumer inflation – was reported Thursday. Inflation perked up 1.98 percent year-over-year, up from 1.92 percent in June. The Fed has a two-percent inflation target. July’s was the fastest growth rate since inflation rose 2.04 percent in April 2012. Yet, the 10-year Treasury rate (2.85 percent) shed two basis points in that session to 2.86 percent. Both core PCE and core CPI (consumer price index) have been trending higher since last September. The bond market only yawns.
This is not the scenario non-commercials who cut back this week but are still massively net short 10-year note futures were perhaps imagining. More so because the recent uptrend in inflation also accompanies strength in other macro data, including GDP. Yet, bond vigilantes act sanguine. Yields did rise to 3.02 percent early August, but that was it, having then dropped to 2.81 percent last week. The risk non-commercials face is when data begin to soften, and it will. After nine years of recovery/expansion post-Great Recession, the current pace of growth is simply unsustainable. This leaves plenty of room for short squeeze down the line.
With this as a backdrop, the neckline of a potentially bearish head-and-shoulders formation on the 10-year breaks around 2.75-2.8 percent. With two-year T-yields at 2.62 percent and a 25-basis-point hike in the fed funds rate later this month imminent, it does not take long for the 10s/2s to invert.
30-year bond: Currently net short 5.7k, down 2.8k.
Major economic releases next week are as follows.
Markets are closed Monday for Labor Day.
The ISM manufacturing index for August is due out Tuesday. July contracted 2.1 points month-over-month to 58.1. February’s 60.8 was the highest since May 2004.
Productivity (2Q18) and the ISM non-manufacturing index (August) are on tap for Thursday.
In 1Q18, non-farm output per hour increased 2.9 percent on an annualized basis. This was the fastest growth rate since growing 3.1 percent three years ago.
Services activity in July shrank 3.4 points m/m to 55.7. January’s 59.9 was the highest ever (although data only goes back to January 2008).
