Courtesy of Lee Adler of the Wall Street Examiner
Markets throwing tantrums got Bernanke to back down on Taper Talk, helping to goose the meltup in stocks that liquidity conditions suggested was going to happen anyway. The Treasury market may not cooperate, with US commercial banks, and foreign central banks still dumping, and Primary Dealers still appearing to be distributing while being behind the curve and positioned wrong. There are few signs that Treasuries will mount much of a rally in spite of the fact that a massive slug of cash will be coming from the Fed next week while new Treasury supply will again be light. It appears that stocks will get most of the benefit of the new cash again, as it provides even more tinder for the meltup.
Meanwhile, wage tax collections have cooled a bit in early July from June’s torrid pace that suggested that June economic data would beat expectations. The early July data is a caution flag that bears watching.
Here are some of the key bullet points in this report:
• The 10 year Treasury yield is due for some consolidation or pullback but it has broken out of a major bottom that suggests that the major trend is now up. The base breakout measures to 3.40, and some intermediate projections point that high also. Longer term indicators suggest yields are headed higher.
• Liquidity conditions are tighter at the turn of the month than at mid month when the Fed settles its MBS purchases, but a revenue windfall from strong tax collections and GSE dividends continue to result in Treasury debt paydowns sending cash back to dealers and investors.
• The Fed will settle $79 billion in MBS purchases and $11 billion in Treasuries next week, creating the potential for the stock market meltup to accelerate. There may be enough cash around for bonds to get a bid.
• Primary Dealers continue to be positioned wrong in the fixed income markets, particularly the Treasury market, adding to that market’s woes and probably crushing dealer profits. Their pattern of activity continues to look like distribution.
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