Fixed Income market thinks Fed is a wuss

Outlook:

Today we get US CPI after a week of mostly disappointing data that seemed to push out Fed rate hike intentions further and further. We also get the University of Michigan consumer sentiment index and leading indicators.

Traders don’t want to buy euros—they just want to be less long dollars, which is why the dollar is fall-ing against everything and not just the euro. In fact, aside from some green shoots, traders have no rea-son at all to buy euros given negative yields and Grexit. If we had favorable US economic data pointing to a June hike, negative yields and Grexit would suffice to put the euro back in the soup. Today’s CPI is not likely to be the catalyst, and in any case, by now it will take more than one data point.

Note, however, that the corrective move has become extreme—over half of the last downmove—and nerves are frayed. Yesterday the euro and Swiss franc both fell by almost 100 points only to recover and close net up on the day--but a 100-point intraday drop is nothing to sneeze at. It shows traders appreciate the move is corrective and temporary, and when it ends, they want to get out of the way of the crash. The problem, of course, is that we never know when it will end. You’d think the Bund yield falling to a record low 0.72 yesterday and another record low of 0.70% today would do the trick, but apparently try-ing to read the Fed’s mind takes priority.

The fixed income market thinks the Fed is a wuss. The 10-year yield is already down to 1.75% this morning at 7 am from 1.878% at the close yesterday in anticipation of soft CPI numbers. Headline CPI is expected to be up a mere 0.1% and that can drive Fed expectations out even further (December?), the yield lower and the dollar lower, too.

At a guess, the market is as “data-dependent” as the Fed and will not be stampeded into a resumption of the primary dollar uptrend by a single Event, although we are entering a weekend fraught with Event Risk in the form of speeches and comments from the corridors at the IMF and G20. So far we have both IMF chief Lagarde and chief economist Blanchard showing no empathy or sympathy for Greece. All the same, everyone knows perfectly well that at some point, we will go from “buy the dip” to “sell the rally” and it could be sometime soon, even this weekend. We hate to admit it, but sometimes we can’t identify the Event that acts as a catalyst to kill a correction. It can be as simple as one of two big names getting fed up with the perversity of the move. How do they know how much is too much? The chart can provide a clue—and again, we would fall off our chair if the euro surpassed the last high from mid-March at 1.1048.

But you never know. The WSJ has a front-page story headlined “Fed Shies Away From June Rate Hike,” which is hardly new news. And yet the litany of Feds backing away is impressive. Yesterday At-lanta Fed Lockhart noted that “Data available for the first quarter of this year have been notably weak” and it “is giving rise to heightened uncertainty about the track the economy is on.” Having named June in Feb, now Lockhart doesn’t mention June. Asked outright, he said June is not off the table but not his preference.

On another front, the G20 draft communique was leaked to the press. Reuters reports that it says we have a heightened risk of financial volatility on central bank divergence. G20 says it’s ready to act against challenges that include FX volatility and prolonged low inflation along with negative interest rates, sustained imbalances and geopolitical tensions. “The nations pledged to pursue fiscal policies ‘flexibly’ to support growth, and cited the need for continued easy monetary policies in many advanced nations. They also said they reaffirmed their previous exchange rate commitments and would resist trade protectionism.” In other words, blather.

While we can imagine—just—a scenario in which the dollar continues to fall on the unwinding of long positions, perhaps to a scary extent—when it comes to the euro, we have a clear ending date. It’s April 24, the date of the eurogroup meeting in Riga. A UBS economist told the FT “The government’s budget situation and debt service schedule appear increasingly challenging… there are clear indications that the eurogroup meeting in Riga on 24 April might not bring a breakthrough. In the absence of a deal in the next few weeks, the government might not be able to avoid default, which — we fear — would likely raise the risk of Grexit.” See the chart of Greek 3-year yields on the next page.

Grexit is becoming the consensus outlook. It’s not entirely a joke that the euro should rally on getting rid of that pesky country, but at the same time, Grexit spells a significant failure for the eurozone. We can-not imagine how the euro can thrive and hold support in the face of default and/or Grexit.

For the day, we look for continuation of the dollar downmove as CPI disappoints, but we all lmow it’s going to disappoint so the surprise factor is missing. Anyone actually short dollars and not just unload-ing or paring big long positions might change their tune. Oil could go back down. Fear over weekend comments could rise. Varoufakis could take off his clothes—he keeps looking for shocking things to do. We could easily see a dollar recovery going into the close and heaven only know what by the Sunday open.