How do you know if regulators are fighting markets or throwing them a lifeline? After the Treasury announced a smaller scale of bond issuance, it seemed that the Ministry of Finance had become more investor-friendly. The feeling intensified amid Jerome Powell’s announcement of tightening financial conditions caused by the Treasuries rally. Finally, at the end of the week there was an explosion – disappointing statistics on American employment allowed the securities to record their best results since the beginning of the year and pushed them up to the previously announced target for longs by 1.08.
Were the Treasury and Fed’s soft approaches to markets an accident? I doubt it very much. Both the Ministry of Finance and the central bank were bothered by the excessively rapid rally in Treasury yields. When interest rates reached 5%, the cup of patience ran out. Rising debt service costs and the threat of recession prompted coordinated intervention. It must be admitted that the regulators chose the right time – in the week of October 31, net shorts of hedge funds in Treasuries reached a record high.
Dynamics of speculative positions on US Treasury bonds
As a result, three events triggered an avalanche: a smaller volume of Treasury issues, Jerome Powell’s speech and data on the American labor market. The massive unwinding of short positions on US debt obligations caused their yields to collapse, inflated stock indices and seriously weakened them.
in October increased by 150 thousand. At the same time, the data for August and September were revised downward by 110 thousand. increased to 3.9%, and the average salary slowed to 4.1% in and to 0.2% in terms of. The labor market is not yet on its knees, but continues to cool. Is it worth freezing it?
Employment dynamics in the USA
There has been a lot of talk on Forex lately that rising prices will trigger a new peak in inflation. That markets are going back in time. In the 1970s. With their double-digit price increases, aggressive monetary restriction by the Fed, the crisis in the Middle East and the double-dip recession.
However, what if last year’s spike in inflation is the result of pandemic effects? It is driven by supply chain disruptions and massive fiscal stimulus. In 2023 the effects dissipate, leading to lower prices. In fact, the world is not facing a new regime of increased PCE and the fed funds rate, but is returning to the old one. To what happened before COVID-19. Towards deflation. If so, then the Fed’s decision to end the cycle of monetary restriction is absolutely correct. You need to sit on the sidelines and see how events develop.
Judging by the market reaction, he is closer to the old regime. It has been formed for decades; most investors are accustomed to low rates. They are also beneficial to the Treasury. So why don’t Treasury yields continue to fall and EUR/USD continue to rise? We continue to buy the euro, increasing the target for longs from $1.08 to $1.088 and $1.094.
2023-11-06 06:32:00
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