Intraday Market Thoughts

Archived IMT (2010.11.03)

by Ashraf Laidi
Nov 3, 2010 14:09

US-10 YEAR YIELDS FALL BACK BELOW their 55-day MA nearing 2.55%, DESPITE stronger than expected services US ISM (54.3 from 53.2), which is consistent with the renewed selloff in the USD (ex USDJPY). Yields have shown significantly strong positive correlation with USD. Regardless of whether the $500-700 bln in asset purchases has been well telegraphed by the Fed, the reality remains that the Fed is the only central bank reverting to full-fledged quantitative easing for at least an extended period. The relative insignificance of the Bank of Japans asset purchase program is a reflect of its timid size; 5 trillion yen, which is equivalent to less than $63 bln. Markets are focusing on the size of Feds QE2 opening gambit as well the projected duration. Announcing $100 bln in monthly purchases of US Treasuries for a minimal total of $500-600 bln appears to be the base scenario. In addition to the monthly and total amounts of asset purchases, the FOCUS WILL FALL ON THE WORDING, which will determine the extent of dovishness and data dependence. Will the extended period phrase become applicable to reinvesting principal payments of treasury holdings? Or, will the Fed base these purchases on the data i.e. until inflation no longer risks falling below zero. The Feds increasing focus on subdued inflation implies that recent stabilization in US data (home sales, ISM, spending & construction) will not stand in the way of increasing the balance sheet. Sep core PCE price fell to a fresh 9-year low of 1.2%, well below the Feds preferred unofficial objective range of 1.5-2.0%. STILL KEEPING A CAUTIOUS BIAS AGAINST S&P500 as it hesitates around the 1195, which is the 200-week MA. Remaining bearish on CHF. Sundays CADJPY call hit 80.45 target as yen accelerates losses across the board.


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