Thursday, March 12, 2015

Good News is Now Bad

We are entering bizarro world in economic news.  Good economic data is now bad for the market.  This is what happens when the market is addicted to ZIRP, and shudders at the thought of a Fed funds rate above 0.  Don't believe for a second the pundits that say that the Fed rate hikes are priced in.  They are not.  The bond market would be much weaker if it thought the Fed would actually get tough and raise rates.  The bond market knows.  It just does.

The German 10 yr Bund is at 0.20%.  The 30 yr Bund is at 0.60%.  The 30 yr Bund is yielding less than a 2 yr Treasury!  The German yield curve has gotten so low, that anything less than 4 years is yielding less than -.20%, which is the cut off for ECB bond buying.  This means that the ECB can only buy longer maturity Bunds, which puts a huge squeeze on the long end there.  The central banks have so distorted the bond market, that you are seeing historically unique behavior.  With the Bund yielding so low, bond managers looking for safe assets feel like they have to buy Treasuries instead even though they fear rate hikes.

We got a very weak retail sales number, and already the brigade is out stating that it was due to cold weather.  More excuses for a economy that will be torpedoed by rate hikes.   US economy is not strong enough to withstand non-zero interest rates, it is addicted to low borrowing costs.

With the bad retail sales number, the dollar is weakening, which should help the market today, as the theme lately has been to sell off the S&P whenever the dollar gets stronger.  This number should keep the dollar bulls away for at least a day.  Probably not longer than that however.  Market should bounce some here, after getting a bit oversold.  I don't expect a big bounce, but it should last for the morning at least.


Anonymous said...

Took a big hit. Sold May 15 CHK calls @ .70.

Long GLD 110 May 15 calls @ 3.65

Ol Dawg

Market Owl said...

Yeah, gold should bounce around here, very oversold.