In the days following last Wednesday's FOMC shake-up, bond markets have visibly lacked inspiration to do much of anything. That could be chalked up in some ways to a relative equilibrium on the part of the incoming data and events, but it could also be the case of a more pronounced move yet to come.
One of the funniest parts of the uninspired post-FOMC trade has been the extent to which Fed speakers have attempted to couch last Wednesday's events (Reuters wrote more on this). Just yesterday, Philadelphia Fed's Plosser essentially said markets shouldn't confuse forecasts made by Fed members as forecasting Fed policy changes. Seriously, he said that.
I think what he was trying to say (which still would have sounded hilarious, but at least been a bit more intelligible) was that the Summary of Economic Projections released last Wednesday merely indicates what individual Fed members think will happen as opposed to what they think the Fed should try to make happen.
See... even this is problematic and I'm sure if I'd paid more attention in that existentialism class in college I could better explain why. In a nutshell, isn't it the individual biases among Fed members that come together to form a broader consensus that the committee can then vote into policy? So, suppose all 15 members in the economic projections expected the first rate hike at the next meeting. When they get together to discuss it, it goes something like this:
Fed member A: "Well guys and gals, I was sorta thinking that it would be good to raise rates at this meeting, but I know none of you want to, so I'll just pass my time off."
Fed member B: "Oh no way! I was totally thinking the same thing but figured none of you would be into it..."
You get the idea. While this is partly in jest, the notion of individual projections informing the consensus on policy can't be avoided. And even if it could be argued that Fed members accelerated their rate hike projections based on what they thought other Fed members would do, that's STILL incredibly significant when it comes to such an important cog in the global financial machine. For Fed members to express bemusement at a market reaction to a noticeable shift in the expected pace of rate hikes is a very scary comment on how well attuned some of them are to market realities.
With all that in mind, we get a break from Fed-speak today and instead get one 2nd-3rd tier piece of economic data in the form of Durable Goods at 8:30am. The afternoon brings the 5yr Treasury Note auction. After 10yr Treasuries, 5's are the most active, and have been especially volatile recently. If any of this week's Treasury auctions have market-moving potential, this is the one.
Here's an obligatory MBS chart showing colliding trends set to be resolved any time now. In other words, prices must either break back above 104 or fall below the only long term uptrend currently on the radar.
If they did, would it matter? Probably not unless it was accompanied by a bigger break into negative territory in Treasuries. 2.80-ish looks like the major line in the sand for 2014.
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