The US 10-year is back to 2.50% this morning

Outlook

The Fed told us it is data-dependent in terms of scheduling the tapering, so now any small negative can roil the market into seeing delay, like yesterday’s existing home sales. Let’s not forget that really hot data should prod the market back to the September schedule.

The market may think one data point will delay the Fed but the Fed doesn’t see it that way, nor do professional forecasters. Bloomberg conducted a new survey of 54 economists (July 18-22) and found that half now see September as the starting point for tapering, and it will be a $20 billion cut to $65 billion—the conventional wisdom for some time now. Only 44% saw it that way a month ago, so the conventional wisdom is building. Assuming that what the Fed seeks is to herd these cats into a consensus so that the Event itself is not disruptive or destabilizing, it is succeeding.

We think the original interpretation of the Fed’s plan was correct—the Fed will announce at the Sept FOMC that it will start tapering purchases and the amount will be $20 billion to begin with and after that, nobody knows. It could rise back up to $85 the very next month or continue downward at $10-20 billion per month, but the target date remains of “no QE” at June 2014. Tapering is not tightening in policy terms but in practice, it’s still a cause of longer-term rates, 2 years and up, to rise. After a dip yesterday to 2.48% on the housing data, the US 10-year is back to 2.50% this morning. We’re not sure this is a QED moment, but it might be. Yields are going up, period. The road may be bumpy and we will see retreats, but the historical norm is 2-3% over inflation and inflation is about 1.8% as of June, so the 10-year should yield 3.8% or more. Any major drop in yields on data is probably mistaken.

This doesn’t help us much with the dollar. We see risk appetite (dollar negative) higher on a seeming promise from China to goose growth, which has little or nothing to do with the Fed. We see gyrations in commodities as investors push back against deleveraging, despite massive outflows. Lots of factors appear, including the biggie, that decent growth in the US makes the world safe for risk and is generally dollar-negative, but let’s not lose sight of those rising rates. They offer some support sometimes.