Slight deflation in Bund yields, from 0.70% last week to 0.55% today

Outlook:

While admitting that yield quotes show too much variability and thus the yield spread is questionable, it’s probably true that US yields would be higher if it were not for Greece. But at the same time, we are seeing only a slight deflation in Bund yields, from 0.70% last week to 0.55% today, so we might also imagine that Greece is interfering with the “normal” fallback that “should” ensue after the roller-coaster of the past two weeks. The Bund yield drop to 0.05% was an overreaction and so was the jump back up to 0.70%, but we find it curious that nobody is even guessing where the right level should be. To the extent that the fate of the dollar depends on the yield spread widening in favor of the US, we are stuck in a swamp.

Market News also brings up the old question of when equities are going to respond to the putative rate hike. If data is simply wonderful, equities can continue firm despite rate hikes, but iffy data can scare the pants off the equity crowd just as well as the fixed income crowd and the equity gang is probably even more prone to fits of hysteria. And yet, as Fed Vice Chairman Fischer keeps telling us, the trajectory of rate hikes will be firmly based on data, so maybe the equity gang has nothing to fear.

Today gives us practically no data to trade on, so the yield spread puzzle, Greece and the true condition of the US economy can remain on the radar screen. We do get mortgage applications, Redbook retail sales and the Treasury will auction 2-year and 5-year notes. Note that Yellen will not attend the Jackson Hole shindig this year (Aug 27-29), where the topic is inflation dynamics and monetary policy. Huh? Maybe August is just too close to the expected September rate hike and Yellen fears loose lips will sink ships.

We also have to complain again about the dollar rally being blamed for the drop in oil, gold and equi-ties—as though bigger fundamentals like supply and demand and earnings are secondary. They are not secondary. It’s the dollar that is secondary, and often not relevant at all. All the same, we have to respect the correlation that so many participants think is there, even if it’s not. Even currency traders, who should know better, will be taking clues from other markets today in the absence of anything else to trade on.

The absence of data gives chart-readers time to fret about the deeply overbought condition of the dollar. Overbought/oversold indicators are screaming that there are no more dollar buyers to be had and posi-tion holders should be paring. But as we often see in the dollar/yen, a currency pair can be overbought/oversold for very long periods of time when the market has a bee in its bonnet.

This time the bee is practically a hive, i.e., monetary policy divergence. You can keep the bees drowsy with the smoke of US GDP well under European GDP in Q1 or some other factor, but traders are all too aware they are going to get stung if they buy into distractions like that. This is another instance when the institutional factor shows off its primacy. In theory, the institutions get their decisions from the data and so it’s a good idea to follow the data to stay ahead of them, but this time Draghi has said nothing will deter him from completing QE into 2016 (and Coeure said QE will be front-loaded in June), while Yellen has said “this year.” Presumably there is data that would change these minds, but it’s wiser to count on these actual promises made by central banks chiefs than on some possible-maybe data that might come along.

Bottom line, there is not enough here in the news or on the chart to support a scenario of the fat correc-tion. Assuming the move in place continues in place with little consolidation, we see the euro slipping down to about 1.0825, the channel bottom.