10-year yields very worrisome

Outlook

The yield on the 10-year is really very worrisome. Levels near 2.50% when the 10-year av-erage is 3.41% mean either the economy is not on track and the bond guys alone can see that, or the bond guys believe the Fed will engage in “lower for longer” practically forever. Even warnings from top-drawer commentators are not diluting faith in a permanently dovish Fed. First up is San Francisco Fed Pres Williams, who said the economic data is consistent with an interest-rate increase in the second half of 2015.

Then we have a similar comment from Pimco chief economist McCulley, who told Bloomberg TV “The economy is healing very nicely. I think the Fed will be hiking probably about a year from now, give or take a few months either way.” Pimco has one of the best track records ever in reading the Fed’s mind, errors by Bill Gross notwithstanding. Third, a Bloomberg survey of economists gets a forecast of the 10-year yield at 3.12% by Dec. 31. Well, how are we going to get there if we have 6 months to go and we are stuck down around 2.5-2.6% with no upward momentum?

Today we get, among other things, the Institute for Supply Management manufacturing index, expected up in June to 55.9 from 55.4 (Bloomberg). This would be the highest reading of the year so far. Can this data be a catalyst?

As for the euro, several other analysts are picking up on our idea that if the market doesn’t do the right thing by the eu-ro—sell it—Mr. Draghi may well do a little jawboning on Thursday. BNP Paribas economist Wattret told the FT “It is a significant problem for the ECB.” Rabobank’s currency strategist Foley said “the ECB is still very much in the shadow of the Fed. As long as Yellen remains dovish, it is going to be quite hard for the ECB to push back against that.” Never mind that a third of economist surveyed by Reuters see the ECB engaging in QE later this year. Euro traders want action, not words, and if they are stuck with just words, they had better be full of drama.

Thursday will be hell. Get ready to get out and see what happens.

Note to Readers: Friday, July 4 is a national holiday in the US, Independence Day. Market are closed. We will not publish any reports.