Friday, November 1, 2013
The Fed's seemingly "glass half full" outlook for U.S. economic growth got additional support from a surprisingly strong Chicago Purchasing Managers Index (PMI) figure. The Chicago PMI jumped to 65.9 in October, up over 10 full points from September and well above the highest analyst estimate. This was the highest reading since March 2011 and the largest month-to-month increase in over 30 years. Solid gains were seen in the employment index (57.7 vs. 53.2 in September) as well as in the reading on new orders (74.3 vs. 58.9 in September). The sheer size of the index gains has made some economists skeptical that this reading may be an outlier rather than an assessment of growth in all regions of the country. However, should further data confirm a strengthening economy, we may see both equity and bond prices decline, as the odds of a Fed tapering in the 1st quarter of 2014 would likely increase.
The Federal Reserve made it fairly clear to market participants that it is keeping its foot on the monetary stimulus gas pedal a bit longer, as no starting date to begin the tapering of its Bond purchase program was announced in the statement released at the end of the two-day FOMC meeting this past Wednesday. However, analysts who enjoy parsing through the verbiage of Fed statements appear to have interpreted a less dovish tone coming from Fed voting members, which triggered a sell-off in both equity and Bond prices. Although there were few changes in the latest Fed statement from that of the previous meeting, it was a bit of a surprise to many traders that there was no mention that economic growth would see any significant headwinds as a fallout from the two-week Federal Government shutdown. Market participants seemed to be expecting the Fed to use the recent government shutdown as a significant factor to continue its bond buying program well into 2014. One of the more "notable" changes in the recent Fed statement was the removal of concerns by Fed officials of tightening financial conditions due to rising interest rates, especially for mortgages, and its effects on the housing market. However, this time the Fed commented that the housing market is still recovering, but at a slower rate. The Fed still appears ready to begin slowing its Bond buying should economic conditions warrant, but will continue to closely monitor economic data and will "await more evidence" that economic growth is sustainable prior to any changes in its accommodative monetary policies, which include the tapering of its Bond buying program.
Looking at the daily continuation chart for Treasury Bond futures (US), we notice that the head and shoulders bottom formation has run into some headwinds, as prices are finding some solid resistance at the "neckline" of this technical pattern. Trading volume has slowed the past few months, as this potential "bottoming" formation has formed. Prices remain above the 20-day moving average (MA), which is providing some comfort for short-term bullish traders that prices may still move higher once the recent price correction has run its course. Resistance remains at the July 22nd high of 136-00, with support found at the 20-day MA, currently near the 133-30 price level.
Mike Zarembski, Senior Commodity Analyst