Surprise Windfall in Treasury Markets

INTEREST RATE MARKET FUTURES

The treasury markets received a surprise windfall yesterday with a better than expected 20-year treasury bond auction. Therefore, the upside extension this morning is underpinned by ongoing demand for longer maturity instruments and is likely to garner additional support from today’s Chicago Fed’s October National Activity Index report. While housing data can be volatile, expectations predict an existing home sales reading 60,000 units below last month. However, the big event of the day will be the FOMC meeting minutes from last month which should be dovish but probably not as dovish as the trade has become given the softening of data since that meeting took place. While there will be a 10-year TIPS auction today we suspect the results will not be as big of an impact as yesterday’s 20-year auction of regular bonds.

In the end, we see the Fed meeting minutes release as a supportive event, but we also suspect the dovish tone will temporarily disappoint the trade, with the Fed then not yet aware of softening jobs, weakening industrial production and further evidence of softening inflation.

In fact, market sentiment has become so dovish/bullish that chatter in the marketplace has started to speculate the US Federal Reserve will cut interest rates around June of next year. In conclusion, the path of least resistance is pointing up with open interest on the current upside breakout jumping sharply which we see as a sign that the trade thinks an uptrend is back in place.

The October Canadian core CPI is forecast to hold steady with September’s 2.8% year-over-year rate. The October Canadian new housing price index is expected to have a minimal downtick from September’s -1.0% year-over-year rate.

The Chicago Fed’s October national activity index is forecast to have a modest downtick from September’s 0.02 reading. October US existing home sales are expected to have a mild downtick from September’s 3.96 million annualized rate. The minutes from the early November FOMC meeting will be released during early afternoon US trading hours. Earnings announcements will include Lowe’s, Medtronic and Analog Devices before the Wall Street opening while NVIDIA, Autodesk, and HP report after the close.

CURRENCY FUTURES

DOLLAR: With another lower low for the move and a test of the 200-day moving average overnight at 103.05, the downward motion in the dollar is beginning to obtain “downtrend status”. While the markets are already heavily vested in the idea of a dovish Fed, the release of the last Fed meeting minutes later today might not match the level of dovishness built into the market since that meeting from a series of soft US data points. However, looking across the screens this morning a growing list of second-tier currencies (Yuan, Indian rupee, South African rand, and Russian roble) are firming against the dollar in what could be a confirmation of even further softening in the dollar. While the markets might be too dovish toward the FOMC meeting minutes released this afternoon, the net Takeaway should ultimately leave the dollar under pressure.

OTHER CURRENCIES: With a new high for the move and positive trade action throughout most of the overnight trade, the euro retains a bullish tilt but also a slightly vulnerable status. A potential headwind for the euro is German debt ceiling negotiations which have resulted in some fracturing of political coalitions in the German government. The bias is up but momentum has slowed, and traders should expect a wave of volatility following the release of the FOMC meeting minutes this afternoon.

The Pound charts have extended yesterday’s bullish action with a new high for the move justified by a significantly lower than expected public-sector net borrowing by the UK government. In other words, the lower debt load should give the Bank of England and the UK government the ability to maneuver to help the economy through the residual drag from historic monetary policy tightening.

Action in the Canadian continues to be nondescript with the currency seemingly content to coil, as if waiting for evidence of the amount of weakening in the US economy. In our opinion, the Canadian has a bearish bias but is being propped up by ongoing weakness in the dollar.

STOCK INDEX FUTURES

Global equity markets overnight were mixed without geographic pattern. While the markets are likely deriving a significant portion of buying interest from the “end of the historic rate hike cycle” new record highs in Microsoft shares has rekindled optimism and perhaps fear of missing out on opportunities. However, tech sector sentiment will be tested by Nvidia earnings scheduled for release after the close today with poor earnings news from Lowe’s early today creating a slightly negative early trade environment. Apparently, Nvidia earnings are expected to be a major catalyst with some investors moving to the sidelines yesterday ahead of those results today. Expectations are for a large jump in revenues in the third quarter and even stronger revenue gains projected in the fourth quarter! Earnings announcements will include Lowe’s, Medtronic and Analog Devices before the Wall Street opening while NVIDIA, Autodesk, and HP report after the close.

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