5th June - Is it all over for US Bonds?
16 June 2015
TECHNICALS:
Weekly chart
The market is sitting right on the long diagonal support from 2007.
Note the co-incidence with the support from the successive Prior Highs
There is no major breakdown yet.
But watch carefully for the price action next week.
Daily chart
This short-term catalyst is thrilling for the bears if the market closes beneath 125.40 tonight.
The two lows from march 2015 and May 2015 look to have been penetrated.
Once the market has closed beneath them, they will be good resistance for any rally.
A bear market ratchets lower using the resistance from prior lows.
FUNDAMENTALS:
For so long Bonds have been a dependable market, driven and supported by weak or no growth, low or very low inflation and exceptionally low monetary policy designed to revive economic growth after the worst financial crisis in living memory.
But now that era is coming to an end. Earlier this year, the expectation was the Federal Reserve would begin raising interest rates in June. Well, June is here and there is no rate rise in sight yet!
So why is there a delay and is it merely a short postponement or are we in for a longer wait?
In much the same way as happened in Q1 2014, Q1 2015 saw the US economy lose momentum and record negative growth, albeit not as steeply as in Q1 2014. Once again, harsh winter weather was blamed for the weakness and the received wisdom was that the economy would roar back in the 2nd quarter. It hasn’t.
This has clearly stayed the Fed’s hand and given policymakers pause for thought. Although only two weeks ago Fed Chair Janet Yellen declared that rates would rise this year, others on the FOMC rate-setting committee have been singing a different tune. So has the OECD, which has urged the Fed to delay hiking rates until the first half of 2016.
This week, the start of a new month, has seen the release of the usual run of heavy weight data. And in truth, the message from both the ISM surveys and non-farm payroll remains mixed.
In addition, earlier in the week, the ISM Manufacturing survey was mildly stronger than expected but that was offset by a weaker ISM non-manufacturing survey. So, as ever, all eyes were on today’s non-farm payroll report.
The result was a growth of 280k new jobs. That is stronger than the recent underlying trend and with the two month revision adding a further 32k of new jobs, the Labour market at least seems to be saying that the economy is back on track.
Given the unemployment report has often been cited as a key indicator for the Fed, today’s report must make a rate hike later this year more likely. But what about other key data releases?
Recent retail sales reports have been disappointing and as a key component of GDP, consumer demand cannot be ignored.
Yellen said rates will go up this year, but thereafter gradually. Clearly the Fed wants to return rates to a normal level and that is likely to be much lower than has been the norm in recent decades. Additionally, the Fed has a bloated balance sheet which it will want to begin shrinking when conditions allow. That will not be until growth is seen as better than tepid or moderate.
We judge that so long as inflation remains benign and growth at best moderate the Fed will tip toe its way into raising rates. Although the first hike may well send bonds lower, is there really a case for a full blown bear market as in 1994 when the Fed began hiking after a recession?
We think not. Conditions are different. Yes, Bonds do look vulnerable, and the Bull market is probably over, but the bears are likely to prove unusually cautious this time around.
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22nd June - The German Bund and the Greek crisis 
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29th May - Watch Sterling beat the Euro