For rates traders fixated on where the Federal Reserve is going with policy in the next few years, a key number is 99.
That’s basically the price where eurodollar futures expiring in December 2023 have been stuck for more than a week. And that means markets have calmed significantly since the feverish early-April bets that policy makers were going to get dragged into a more hawkish stance.
Markets look poised to sit at this crossroads for a while. Few expect central bankers to adjust their stance when the Federal Open Market Committee meets next week or signal that they’re ready to start tapering bond purchases. Wednesday’s decision, along with Fed Chairman Jerome Powell’s press conference, could pave the way for greater conviction in the market, but that’s more likely to happen in the days and weeks that follow as economic reports roll in. Most policy makers have been resolute that they don’t plan to hike before the end of 2023.
“We need to see some bit of new information, perhaps data surprises even further to the upside,” said Michael Lorizio, a senior bond trader at Manulife Investment Management in Boston. “The Fed did a pretty good job at its March meeting of indicating that its new framework will keep policy makers on the sidelines for quite a while.”
Current eurodollar positioning underscores the need for fresh drivers to cement traders’ expectations on the timing of the Fed’s next tightening cycle. Timing matters because the market has a propensity to reprice aggressively when needed to account for faster-than-expected growth, as demonstrated in the first quarter -- a dynamic that could reemerge if both traders and the Fed are behind the curve.
As December 2023 eurodollars illustrate, traders have adjusted their views on Fed policy all year. In January and much of February, the contract’s price was above 99, signaling traders were closer to the Fed’s dovish stance on rates.
It then fell below that in late February and largely stayed there, showing that expectations had shifted toward a more hawkish Fed outlook. The selloff was at its most intense April 5, when it bottomed below 98.7 following a stellar jobs report. But the price has been back up around 99 since mid-April.
It’s not just eurodollars that are at a crossroads. In a note Friday, Citigroup Inc. strategists William O’Donnell, Ed Acton and Yangyi Li wrote that the U.S. rates market is at “a moment of [tactical] truth.” Traders, they said, will soon decide if the recent short-covering rally in bonds will continue or whether the reflation narrative reasserts itself.
They point to the 5-year Treasury rate and 10-year real yield, which strips out inflation to reflect a pure read on growth. Technical data suggests that the 5-year security is not only “overbought,” but that the recent momentum behind its April rally is starting to slow. The yield was around 0.82% on Friday.
Meanwhile, the 10-year real yield, at around minus 0.78% on Friday, is hovering not far from the “well-defined” lows of the range seen since February and looks to be “locally and deeply overbought,” the strategists wrote.
For Greg Wilensky at Janus Henderson Investors, there’s going to be “a lot of ‘moments of truth’” over the next three to six months.
“Can we see some sharp moves in one direction or another?” asked the Denver-based head of U.S. fixed income. “It’s quite likely, as the result of people from one camp or another changing their minds. But one move in one direction doesn’t mean that trade will continue.”
What to Watch
- Economic calendar:
- April 26: Durable and capital goods orders; Dallas Fed manufacturing index
- April 27: FHFA house price data; S&P CoreLogic home prices; Conference Board consumer confidence; Richmond Fed manufacturing gauge
- April 28: MBA mortgage applications; advance goods trade balance; wholesale and retail inventories; FOMC decision
- April 29: Jobless claims; gross domestic product; Langer consumer comfort; pending home sales
- April 30: Employment cost index; personal income and spending; PCE deflator; MNI Chicago purchasing managers index; University of Michigan gauges
- Fed calendar:
- April 28: FOMC decision; Powell’s press conference
- April 29: Vice Chair for Supervision Randal Quarles discusses financial regulation
- April 30: Dallas Fed President Robert Kaplan speaks
- Auction schedule:
- April 26: 13-week, 26-week bills; 2-year, 5-year notes
- April 27: 2-year floating-rate notes; 7-year notes
- April 29: 4-week, 8-week bills
— With assistance by Benjamin Purvis
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