The Weekly Report


  • The week is wrapping up with a flurry of Treasury buying. Valuations are still cheap against other high grade sovereigns, so markets have not finished their assessment of the ‘right’ level on 10-yr UST or 30-yr UST which can sustain two-way traffic without bottlenecks or poor liquidity. It is difficult to pin today’s lower yields on volatile risk markets because the curve maintains its steeper bias.
  • Implied volatility is lower for stocks even as hourly prices are impossible to pin down. Credit spreads keep trying to stabilize then leak wider when stocks spasm again. It helped that “trouble makers” such as Italy have stayed out of the headlines today. Commodities stopped falling, and the dollar held small gains.
  • Markets gapped in multiple directions at once as each sector shot to any level that moved misaligned postions. Liquidity on long Treasuries cost 3-5bp on active trades Tuesday, and the backlash whipped around the world shortly thereafter. When the backlash didn’t slow the fall in UST prices, risk became even uglier. Markets remain volatile at the end of the week, but liquidity is better. The price for liquidity, though, is still depressed asset prices. A comparison of October trading to a similar profile last February, then observations why so many markets were primed to go haywire at once.
  • In a busy week, it’s easy to overlook the CPI print. Don’t. Inflation Lab charts show the shortfall in inflation versus expectations actually fit the benign pattern of the last six months. Prices will have to begin accelerating before the end of the year to get within shouting distance of Fed estimates for the first quarter. Price trends are not cooperating with perfectly good economic theories.
  • Last, a quick look at an important Fed speech then a longer look at 10-yr technicals. They remain scrambled, but the 5-yr offers a sensible and effective barometer for the next several weeks.
  • The next publication date is November 2.
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