Treasury Prices Near Multi-Month Highs

INTEREST RATE MARKET FUTURES

Despite an extension of macroeconomic optimism flowing from global equity market gains, treasury prices remain near multi-month highs on the charts to start the Tuesday trade. In retrospect, comments from the Chicago Fed President yesterday indicating the markets attempt to front run a potential rate cut is not supported by the policy discussions he has been involved in at the Fed has tempered bullish sentiment. The CME Fed watch tool has only an 8.3% chance of a 25-basis points rate cut in the January 31st FMOC meeting with the probability of a rate cut in the March 20th FOMC meeting increasing to 66.7% which suggests the trade is getting ahead of itself expecting a cut anytime soon.

With expectations for today’s US building permits and housing starts data calling for a slight softening that should add to the minimal upward track. As indicated yesterday the significant reversal/drop-in US mortgage rates did not take place until after the final week of November and therefore a surprise from the housing reports today would likely be softer than expected.

The North American session will start out with a weekly private survey of same-store sales that may carry additional weight as it will cover holiday season shopping. November Canadian CPI is expected to have a modest downtick from October’s 3.1% year-over-year rate. November US housing starts are forecast to have a modest downtick from October’s 1.372 million annualized rate, while November US building permits are expected to have a mild downtick from October’s 1.498 million annualized rate.

The October Treasury International Capital (TIC) report will be released during afternoon US trading hours and will show net changes to Chinese and Japanese Treasury holdings. Atlanta Fed President Bostic and Chicago Fed President Goolsbee will speak during afternoon US trading hours.

STOCK INDEX FUTURES

Most global equity markets overnight remained in an upward track with gains reaching as high as 0.8% in Australia, while the Hang Seng was the lone market tracking lower. While the magnitude of the gains in US equities this morning are not notable, the bullish bias remains in place with investors continuing to discount negative corporate headlines and instead embraced the mantra of falling rates.

E-Mini S&P 500: The bias is up with the lower rate mantra still echoing in the market despite the growing staleness of that theme. However, today’s housing starts and permits data combined with some very soft overnight European price data should leave classic fundamental conditions in place.

The bias in the Dow remains up but the market has stalled with a quasi-double high presenting thin resistance starting at 37,772. While it is premature to suggest end of year profit taking by funds to protect stellar returns, the rate of gain in the Dow over the past 40 days has been historic and the inability to hold 37,500 could trigger a retracement.

CURRENCY FUTURES

The recovery action in the dollar has lost momentum potentially signaling a lack of bullish fundamental justification. In fact, the dollar failed to see a definitive rally from the Chicago Fed President claims yesterday that the market’s expectations of a US rate cut were premature and were not part of the discussions he has been involved with at the Fed. Furthermore, overnight financial press headlines are suggesting European bonds are becoming the “top pick”, the prospect of soft US housing data and a significant drop off in dollar index trading volume on the recent bounce suggests the dollar downtrend is not at an end.

Despite a noted softening of Core Harmonized Price, readings from the euro zone the Euro is tracking positive because of expectations of soft US housing data, and perhaps because of headlines touting the return of European bonds to the top echelon of global investment instruments. Just as the dollar is undermined by Fed comments yesterday challenging the market’s expectations of a US rate cut early next year, the euro should be underpinned and lifted by that development.

While the charts in the Pound are not impressive, the market has corrected the overbought condition from the sharp rally last week, and the currency should continue to win by default against a choppy/weak US dollar.

Interested in more futures markets?  Explore our Market Dashboards here.