Here's why next week could be wild for the markets

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Published Date 6/8/2018

A nice short covering rally yesterday when the bellwether 10 yr note pushed up to 3.00% and wasn’t able to move above it. Nothing of significance changed; today the G-7 meeting, next week is one of the most important weeks the markets have to work through this year. Treasury will sell $22B of 10s on Monday, $14B of 30s on Tuesday. FOMC meeting, Bank of Japan meeting and the ECB meeting. The FOMC would shock markets next week if it doesn’t increase the Federal Funds rate. Along with the FOMC meeting, the Fed will release its quarterly update on inflation and economic growth extending out a couple of years. Jerome Powell’s press conference will be a huge focus (what he thinks about inflation, growth, the trade issues). The ECB based on comments this week from officials is likely going to outline a plan to withdraw its QEs and increase its base lending rate. And there is the summit between Pres. Trump and North Korea’s Kim in Singapore. On the data next week; CPI and PPI, retail sales, import and export prices, May Treasury budget are the headlines.

Pres. Trump leaving for the G-7 meeting in Canada still driving his hard line on trade; prior to his helicopter ride he held an impromptu press conference on the White House lawn and let it be known he isn’t about to back down on his belief the US has been taken advantage for years over trade imbalances with Canada specifically. He will attend but plans to leave early turning his seat over to his deputy assistant for international economic affairs, Everett Eissenstat. Trump commented he wanted Russia back in the Gs; used to be G-8 but Russia was left out four years ago when it annexed Crimea.

Former Fed chief Ben Bernanke commenting yesterday that the Trump stimulus may fade soon. Bernanke worries about the $1.5 trillion tax cuts and $300B in spending will make the Fed’s job more difficult. “What you are getting is a stimulus at the very wrong moment,” Bernanke said yesterday during a policy discussion at the American Enterprise Institute, a Washington think tank. “The economy is already at full employment.” The stimulus “is going to hit the economy in a big way this year and next year, and then in 2020 Wile E. Coyote is going to go off the cliff,” Bernanke said, referring to the hapless character in the Road Runner cartoon series.(Bloomberg). The Congressional Budget Office forecast in April that the stimulus would lift growth to 3.3% this year and 2.4% in 2019, compared with 2.6% in 2017. GDP growth slows to 1.8% in 2020 in the CBO projections. Fed officials predicted 2% growth in 2020 in their March median projection; next Wednesday the Fed will release its updates at the FOMC meeting.

At 9:30 the DJIA opened -24, NASDAQ -27, S&P -3. 10 yr at 9:30 2.93% +2 bps. Fannie 4.0 30 yr coupon -5 bps from yesterday’s close and +12 bps from 9:30 yesterday.

The only data today, and it isn’t that interesting to traders, April wholesale inventories; expected +0.1%, was +0.1% with sales +0.8%.

Our technical models and the coming underlying fundamentals next week put the bond and mortgage markets in the continuing neutral position. Yesterday another one off rally day with no follow-through so far today. Yesterday the one-off heavy short-covering after the 10 held at 3.00% dropped the rate briefly to 2.89% then moved up to close at 2.91%. 2.90% is a technical resistance level.

Source: TBWS

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