Bond Market UpdateUpdated 3:35pm EST June 19, 2013
Moving the Market
MBA Mortgage Index: Actual -3.3%, prior 5.0%
FOMC Rate Decision
Chairman Bernanke Press Conference
Treasuries Hammered Post-FOMC: Treasuries were hammered to session lows following the release of today's FOMC Statement, and continued lower throughout Fed Chairman Ben Bernanke's accompanying press conference. Today's Statement met market expectations as the FOMC suggested it would continue buying a total of $85 bln per month in agency mortgage-backed securities and Treasury securities and that it is prepared to ' increase or reduce the pace of its purchases to maintain appropriate policy accommodation as the outlook for the labor market or inflation changes.' However, during his accompanying press conference Chairman Bernanke suggested if conditions and trends continue the Fed could reduce its purchases later this year and through mid-2014 when the program could end. Heavy selling engulfed longer dated maturities with those seven years on up all ending lower by just more than one full point. The weakness weighed heaviest on the belly of the curve with the 5-yr surging 17.5 bps to 1.227%, marking its highest close since August 2011. Elsewhere, the benchmark 10-yr yield jumped nearly 13 bps to end the day at 2.311% to see its highest close since March 2012. The long bond outperformed as its losses ran the 30-yr yield up just 7.2 bps to 3.414%, but it too still settled at its highest since March 2012. Significant curve steepening developed on the selloff as the 2-10-yr spread widened to 201 bps. Meanwhile, precious metals ended on their lows as gold fell $8 to $1359 and silver shed $0.30 to near $21.40. Thursday's data menu is full with initial and continuing claims (8:30), existing home sales, the Philadelphia Fed, and leading indicators (10).
Dollar Surges Post-FOMC: The Dollar Index spiked to session highs above 81.05 as traders rushed into the greenback following today's FOMC decision which failed to include any clues to tapering of the Fed's bond buying program. Participants are now awaiting Chairman Bernanke's press conference. A victory for the bulls would be the retaking of the 200-day moving average near 81.10.EURUSD is -75 pips at 1.3315 as trade slumped to session lows following the release of the FOMC Statement. The selling has erased two days of gains and has bears looking to test 1.3200 support. Eurozone data is heavy as Flash Manufacturing and Services data from across the region accompany German PPI. Eurogroup meetings will take place in Brussels. GBPUSD is -85 pips at 1.5550 as trade nears a test of support in the 1.5500/1.5550 area. Recent action has struggled to hold the 200-day moving average (1.5700), which has been pressured for much of the past week. British data includes retail sales and CBI Industrial Orders Expectations. USDCHF is +65 pips at .9265 as trade jumped off the key .9200 support level. The gains now have action pressuring the .9250 level, which has held for the past week. The next level of resistance comes into play near .9300 with additional help coming from the 200-day moving average (.9340). Switzerland's Financial Stability Report is due out tomorrow along with the Swiss National Bank's rate decision. USDJPY is +100 pips at 96.35 as trade gains for a third day. Today's bid has the pair on track to close at its best level in over a week as action now readies for a test of the 100-day moving average (96.80). AUDUSD is -85 pips at .9400 as trade pressures 33-month lows. The hard currency was holding near its best levels of the session ahead of the decision, but was hammered to its lows in reaction to the Statement. China's HSBC Flash Manufacturing PMI will cross the wires tonight. USDCAD is +25 pips at 1.0240 with today's bid running the pair back above its 50-day moving average. The pair is now on track to close at its best level in two weeks with action now setting up for a test of resistance in the 1.0280 area.
Central Tendencies and Ranges of Economic Projections:
Fed Timing of Monetary Policy:
FOMC Excerpts:"Information received since the Federal Open Market Committee met in May suggests that economic activity has been expanding at a moderate pace." "Labor market conditions have shown further improvement in recent months, on balance, but the unemployment rate remains elevated." "Household spending and business fixed investment advanced, and the housing sector has strengthened further, but fiscal policy is restraining economic growth." "Partly reflecting transitory influences, inflation has been running below the Committee's longer-run objective, but longer-term inflation expectations have remained stable." "The Committee sees the downside risks to the outlook for the economy and the labor market as having diminished since the fall." "The Committee also anticipates that inflation over the medium term likely will run at or below its 2 percent objective." "To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee decided to continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month and longer-term Treasury securities at a pace of $45 billion per month." "The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. Taken together, these actions should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative." "The Committee will closely monitor incoming information on economic and financial developments in coming months." "The Committee will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until the outlook for the labor market has improved substantially in a context of price stability." "The Committee is prepared to increase or reduce the pace of its purchases to maintain appropriate policy accommodation as the outlook for the labor market or inflation changes. In determining the size, pace, and composition of its asset purchases, the Committee will continue to take appropriate account of the likely efficacy and costs of such purchases as well as the extent of progress toward its economic objectives." "To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens. In particular, the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee's 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored. In determining how long to maintain a highly accommodative stance of monetary policy, the Committee will also consider other information, including additional measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent." "Voting against the action was James Bullard, who believed that the Committee should signal more strongly its willingness to defend its inflation goal in light of recent low inflation readings, and Esther L. George, who was concerned that the continued high level of monetary accommodation increased the risks of future economic and financial imbalances and, over time, could cause an increase in long-term inflation expectations."
Afternoon Update: 2-yr unch @ 99 30/32...3-yr unch @ 100 00/32...5-yr -03/32 @ 99 19/32...7-yr -04/32 @ 98 16/32...10-yr -07/32 @ 95 28/32...30-yr unch @ 91 04/32...EURUSD +10 pips @ 1.3405...GBPUSD +20 pips @ 1.5660...USDJPY -20 pips @ 95.15...USDCHF -10 pips @ .9190...AUDUSD +55 pips @ .9540...USDCAD -25 pips @ 1.0190
Long Bond Outperforms: Treasuries have slipped to session lows as a rash of selling developed ahead of the noon hour. Selling has been most pronounced in the belly of the curve as yields there are higher by close to 2.5 bps. The weakness has run the benchmark 10-yr yield above 2.210% with action holding just below last week's 14-month closing high of 2.230%. The long bond continues to outperform the rest of the complex as action fluctuates between gains and losses. Curve steepening persists along the yield curve with the 2-10-yr spread widening to 194 bps. Elsewhere, precious metals are mixed with gold up $6 at $1373 and silver off $0.05 near $21.65.
All Eyes on Bernanke: The Dollar Index is trading at the low end of the recent 80.50-81 consolidation range. Market participants await the Fed announcement this afternoon with the statement and projections due out at 2pm and the Fed Chairman press conference at 2:15pm. The speculation promises to run rampant, and while the Fed remains data dependent, market participants will look to be first to the door on signs of tapering. Some of this has already been priced in over the past couple of weeks. But the DXY promises to be volatile after the news which should break it out from its recent range.The euro continues to battle the 1.34 resistance level. It was a light day of news in Europe with a weak Spanish trade balance the only economic data of note. The single currency will be driven by moves in the dollar today. So a pop in the dollar on any signs of tapering, coupled with this 1.34 technical resistance, would likely send the euro tumbling lower. The pound is bouncing around in the 1.5650 area this morning. The currency has been holding this level since being rejected at the 200 dma (1.5700) late last week. The latest Bank of England minutes were released, but there was nothing new. The board continued to vote 6-3 against further asset purchases and all are in favor of the current 0.50% interest rate. The governorship will now turn to Mark Carney for the July meeting. This will prove to be more interesting for participants, rather than the recent lame duck sessions of the outgoing Mervyn King. The yen is trading around the 95 level ahead of the Fed meeting. This is another currency that promises to be volatile this afternoon. The 94-95 level has been providing resistance over the past week. The country's trade balance showed a slightly higher than expected deficit but it did not have a major impact on the currency.
Treasuries Hover Little Changed: Treasuries hover little changed as many traders remain on hold ahead of this afternoon's FOMC rate decision, waiting to see if any clues are provided to if/when the Committee may begin to taper its bond buying program. Light selling has developed across most of the complex with yields higher by less than 1 bp. The small uptick in yield has the benchmark 10-yr near 2.190%. Meanwhile, the long bond is slightly outperforming as an 11/32 advance has its yield off close to 1.5 bps at 3.328%. Slight steepening continues along the yield curve as the 2-10-yr spread trades wider at 191.5 bps. Elsewhere, precious metals are just off their best levels as gold trades up $6 at $1373 and silver is little changed near $21.70.
Dollar Steady Ahead of the Fed: The Dollar Index is flat near 80.65 following a rather quiet overnight trade that saw just a 15 cent range. Participants remain on hold as they await this afternoon's FOMC decision which is likely to provide clues as to if/when the Committee will begin tapering its asset purchase program.EURUSD is -5 pips at 1.3390 amid after overnight trade was limited to a 25 pip range. The single currency has run close to 600 pips over the past month with action lingering near a four-month high. Any pullback will be greeted by 1.3200 support while a run through 1.3450/1.3500 sets up a test of the February highs near 1.3650/1.3700. GBPUSD is -5 pips at 1.5635 after the release of the latest Bank of England minutes. The minutes were from the last meeting with Mervyn King at the helm of the central bank and showed a 6-3 vote in favor of keeping the central bank's asset purchase program unchanged at its current GBP375 bln. Mark Carney will take over the reins of the central bank in July. The 1.5700 level continues to provide resistance with the help of the 200-day moving average while support rests in the 1.5500/1.5600 area. USDCHF is +15 pips at .9215 as trade continues to probe .9200 support. Little response has occurred on the heels of the unchanged Swiss ZEW Economic Expectations survey, which held at 2.2. USDJPY is -15 pips at 95.20 as trade has pulled back from its overnight high of 95.70. Action in the pair has been volatile after Japan posted its largest May trade deficit on record (JPY0.82 trln). The deficit came as exports surged 10.1% YoY, but imports jumped 10% as the weak yen made them more expensive. AUDUSD is +5 pips at .9490 after managing to survive an early test of .9450 support. Overnight, Australia's CB Leading Index crossed the wires, posting a 0.3% MoM advance (0.1% MoM previous). USDCNY ticked down to 6.1269. USDCAD is flat at 1.0115 as action holds on the 50-day moving average. Overnight buying provided a test of the 1.0250 level, but the gains were unable to hold. Canada's wholesale sales are due out later this morning.
Treasuries Flat Ahead of the Fed: Treasuries are little changed as traders remain on hold ahead of today's FOMC decision. Participants are not expecting any change from the current policy, but are on the lookout for clues as it if/when the Committee will look to begin tapering its bond buying program. Maturities across most of the complex hover flat while the long bond outperforms with 4/32 advance. The flat trade has all yields holding within 1 bp of yesterday's cash close with the 10-yr stuck near 2.185%. Little change along the yield curve has the 2-10-yr spread slightly wider at 191 bps. Elsewhere, precious metals are mixed with gold unchanged at $1367 and silver off $0.10 near $21.55. Today's data is limited to the weekly MBA Mortgage Index (7:30) with the main event being the FOMC rate decision, release of economic projections (14), and Fed Chairman Ben Bernanke's press conference (14:30).
Treasuries Finish Flat: Treasuries ended the day little changed as traders await tomorrow's FOMC meeting. There is no changed expected from the Fed's current course of action, but participants will be parsing the words of the Statement as well as Fed Chairman Ben Bernanke's testimony. This morning's housing starts (914K actual v. 950K expected) and building permits (974K actual v. 983K expected) both fell short of estimates while CPI posted an in-line 0.2% advance. The complex saw light selling ahead of the data, but buyers were in charge for the remainder of the day as action settled little changed. The benchmark 10-yr yield ticked up to almost 2.22% immediately following the data, but managed to slip to 2.182% by the cash close. Today's settlement was 5 bps off last week's 14-month high. Slight outperformance from the long bond pushed its yield down less than 1 bp to 3.342%. Slight flattening developed along the yield curve as the 2-10-yr spread narrowed to 190.5 bps. Elsewhere, precious metals remained under pressure as gold fell $16 to $1367 and silver slipped $0.15 to near $21.60. Wednesday's data is limited to the weekly MBA Mortgage Index (7:30) with the main event being the FOMC rate decision, release of economic projections (14), and Fed Chairman Ben Bernanke's press conference (14:30).
Dollar Slides Ahead of Tomorrow's FOMC Meeting: The Dollar Index jumped into positive territory following this morning's data as action tested the 81.00 level, but quickly reversed into the red as equity markets opened up with gains and continued climbing. Action sank to session lows near 80.60, and has held there throughout the afternoon as traders await tomorrow's FOMC meeting.EURUSD is +45 pips at 1.3405 as trade looks to post its best close in four months. The single currency continues to shrug off potential headwinds from Greece, as well as today's report Cyprus is looking to alter the terms of its bailout. Near-term support remains near 1.3200 while a run above the 1.3450/1.3500 area puts the February high (1.3700) in focus. GBPUSD is -65 pips at 1.5650 as trade has managed to claw back a majority of its early losses. Sterling sank to a one-week low of 1.5565 as a result of this morning's data, but steady buying has persisted over the course of U.S. trade. The bid developed after the pair was able to hold support in the 1.5550 area with action now climbing back towards the 200-day moving average (1.5695). The minutes from Mervyn King's final Bank of England meeting will be released tomorrow. USDCHF is -35 pips at .9190 as trade probes the .9200 support level. Today's weakness has action on track to close at a four-month low as bulls remain unable to take control. Swiss ZEW Economic Expectations will be announced tomorrow. USDJPY is +55 pips at 95.20 as trade ticks higher for a second session. Buying has developed despite German Chancellor Angela Merkel providing some pushback against the impact Japan's policies have had on foreign exchange. Early buying failed at the 96.00 resistance level, but tomorrow's session will still give the pair a chance for its first three-day winning streak in over a month. Japan's trade balance is due out tonight. AUDUSD is -50 pips at .9500 as sellers remain in control. The hard currency is lower for a third straight session, and has now erased almost all of Thursday's surge. Earlier selling pressured 33-month lows, but so far the .9450 level has held. Australia's CB Leading Index will cross the wires this evening. USDCAD is +10 pips at 1.0200 as trade remains trapped between the 50- and 100-day moving averages. Look for the pair to test the 1.0275 region if it is able to climb above the 50-day moving average (1.0205). Canadian data is limited to wholesale sales. Bank of Canada Governor Stephen Poloz will speak in Oakville, Canada.