What Bonds’ Implosion Says About The Fed

  • May 11, 2001
  • Marc Dupee


T-bonds
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pockets of economic strength in a climate of confidence and rising prices.
Today’s down-move matched the January 3 huge downdraft in bonds that came on
the day of the Fed’s first surprise interest rate cut this year. 

Unexpectedly strong retail sales in April and
stronger-than-expected consumer-sentiment figures out from the
University of Michigan both worked to negate recent reports and shift the widely
held view that the Fed may not cut interest rates by 50 basis points next Tuesday. With
perhaps too much of an interest rate cut already priced in, traders obliterated bonds
selling them down nearly two whole points, or 1 27/32 to 99 6/32. 

I spoke with Tony Crescenzi yesterday and he spoke of the
likelihood of such a scenario playing out. He said a
“curve-flattening” trade would be in order if confirming signs of an
economic turnaround appeared where one buys the short end (5-years) and
sells the long end (t-bonds). Sir Anthony and his trade will be featured in next
week’s Trade of The Week.

T-bonds provided multiple intraday trading opportunities
including an intraday Turtle Soup reversal. This reversal strategy, revealed by Connors and Raschke in
their book Street Smarts (available at TradersGalleria.com)
uses a 20-day extreme — the April 30 low at 99 31/32 in this case — as the buy
trigger with the sell-stop-loss going at today’s session low at 99 25/32.
T-bonds then consolidated on their lows in a Slim Jim before breaking down again
and shedding another point. 

June dollar index futures
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European Central Bank’s surprise .25% rate cut yesterday. Traders were, in part,
punishing the ECB for not better broadcasting its intentions. The dollar also
rose as
euro FX futures
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to data from the continent showing that inflation rose in Germany, France, the
Netherlands and Spain. Weak sales figures from Germany suggested Europe’s
largest economy is slowing as prices rise. This situation may further stymie the
ECB’s decisiveness or capacity to enact stimulative monetary policy. The
dollar index gained .46 to 116.98, the ECM1 fell .00530 to .87590, and the SFM1
slipped .0021 to .5723.

Trading action in the grains turned mixed. July wheat
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followed through on a Turtle Soup Plus One Buy Reversal triggered yesterday, but
the trade was very sloppy before closing 2 3/4 higher at 271 1/4. Wheat has lapped open for the past two sessions, indicating upside pressure in
this contract at a low. 

Soymeal
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bullish flag, a W-at-a-low, and is just below its Pullback From Highs
trigger. Meal closed 1.3 higher at 155.8.

 

Soybean oil
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 setup. An Off The Blocks short entry is triggered in contracts from the
Implosion-5 List as well as the
New 10-Day Lows List (they can show nascent downside momentum). Bean oil
lapped higher, meaning that a short entry was not triggered until the contract
surpassed the prior day’s, and today’s, early intraday low. Bean oil closed
.1000 lower at 14.6600.