By Wednesday of this week, we were assessing the possibility of a positive break of the range in bonds. Yesterday, those hopes were dashed by a fairly brisk sell-off that took us right back into the previous, super narrow trading range. C’est la vie, right?
This morning’s economic data was so perfectly crappy that it has quickly pushed bonds to even better levels than those seen on Wednesday, thus reigniting hopes that narrow August range is breaking in our favor. The elephant in the room, however, is the upcoming Jackson Hole symposium, culminating in Yellen’s fireside chat on August 26th. It could even be such a source of indecision that is sees the relative preservation of the range for 2 more weeks.
Jackson Hole will most likely have a binary outcome this year. Normally there are 3 general outcomes for Fed policy communications and speeches. They are as follows:
- Fed is more accommodative than markets thought
- Fed is less accommodative than markets thought
- Fed is so ambiguous that markets don’t know what to think
But this time around, if the Fed is ambiguous with so little time left on 2016’s rate hike clock (only September and December left as viable rate hike meetings), markets will simply read it as “more accommodative.” It’s stealth accommodation, really. The Fed constantly keeps the prospect of a rate hike in the relative near term, but the horse can’t seem to get any closer to the proverbial carrot.
Is the Fed playing a card that loan officers know all too well? “Lock your rate because there’s a risk they could go higher.” Is this sense of an imminent rate rise serving to motivate more business activity than it otherwise would if rates were simply guaranteed to stay at current levels?
Even though this thesis is a quasi-conspiracy theory, if we apply the LO’s “hurry before the deal gets worse” logic, it actually makes good strategic sense. At the very least, it would help to explain the rampant corporate bond issuance as companies rush to take advantage of low funding costs in case the cost of money happens to increase some time in the next 4 months.
Back to today though… Let’s see how well this data-motivated breakout holds into the afternoon. If we see the Friday leakage that we sometimes see, it will be a strong tacit suggestion that “the range” isn’t going down without a fight.