Feds Intentions

http://globalhomefinance.com

Very late yesterday afternoon in the Q&A after Bernanke’s speech he responded to questions about the Fed’s intentions. Bernanke blew up the bond and mortgage markets a month ago with his comments the Fed was essentially preparing to begin reducing the monthly purchases of treasuries and mortgage-backed securities. He and the majority of FOMC members were seeing the economy improving and the Fed wouldn’t need to continue to its $85B of monthly purchases. Since his remarks on 6/19 the 10 yr note rate increased 50 basis points and 30 yr mortgage rates climbed 60 basis points in rate. Bernanke was obviously shocked at the swift and deep market response; yesterday more market manipulation. He called for maintaining monetary stimulus. Bernanke said yesterday that “highly accommodative monetary policy for the foreseeable future is what’s needed” and minutes of the Fed’s June meeting showed officials would want to see more signs of job growth before starting to scale back their $85B-a-month bond purchases. The Fed is continuing to manipulate markets with contrary comments; one month after saying the Fed was about to reduce its QEs, now he told markets, not so fast people. The 10 yr note rate at 4:45 yesterday afternoon at 2.68%, this morning 2.58%; 30 yr MBS from prices at 4:45 yesterday have increased 54 basis points.   This morning at 8:30 weekly jobless claims were expected to be down 6K, claims actually increased 16K to 350K. The 4 week average increased 6K. The report falls right into Bernanke’s remarks yesterday that the economy still needs stimulus. The jump in claims however, may be due more to auto plants that close for re-tooling for the new model year.   At 9:30 the DJIA opened into a new all-time high, up 124, NASDAQ +37, S&P +13. 10 yr note at 2.59% -8 bp frm yesterday and 30 yr MBS price +34 bps.   At 1:00 this afternoon  Treasury will auction $13B of 3 yr bonds, after Bernanke yesterday the auction is likely to see good demand. Yesterday’s 10 yr auction didn’t get strong demand but it was better than previous 10 yr auctions but still didn’t meet the last 12 10 yr auctions averages.   There ought to be a “law” that the Fed chairman can’t make speeches and take questions after markets have closed. We are hearing stories that traders were angry that they were unable to get out of their shorts covered. Bernanke set up the huge short positions in the bond and mortgage markets a month ago then late yesterday twisted his remarks almost 180 degrees. What is next? Next week he has to go before Congress for the semi-annual testimony on the economy. Will be pull another rabbit out of his hat? What color might the rabbit be, black or white? It is no wonder that the current bull market in stocks has been characterized as the most hated bull market in history. In the interest rate markets he accomplished one thing, he stopped the climb in rates; it had become so volatile that there was an increasing belief within many corners that the 10 yr was headed to 3.00%. For the moment that thought has been tossed; HOWEVER the reaction in the markets has not changed the technically bearish outlook; everything is still negative. To turn the 10 yr to a bullish technical picture the 10 yr will have to close below 2.50% (2.59% now). Will it happen? We are not about to conjecture given the way the Fed can move markets anyway it wants these days. We still hold that long term rates including mortgage rates will not fall to the lows seen a few months ago. The one thing we are sure of, as we have been saying for weeks; market volatility will remain at very high levels.