Looking for a Catalyst
The markets have been largely range bound as the themes that have absorbed the market over the past several weeks remain in place and are likely to take us into the end of the year. In particular the continued strength in the U.S. dollar, driven by diverging monetary policies, has given little ground recently and very well may be a theme that we will continue to discuss next year. Part and parcel are the economic surprises from the developed world, which continue to favor upside gains in the U.S. and weaker results from the EZ, Japan and, most recently, from UK inflation data. This has become an all too common refrain recently, as expectations for central banks have been altered to full out QE for Japan and the ECB and delayed policy normalization for the Fed and BOE. At the moment the futures markets are pointing to a Sept/Oct 2015 lift-off date for both the BOE and ECB, which we continue to think is a tad generous, at least for the Fed, where we continue to favor a mid-summer 2015 rate hike. Irrespective, we are talking the difference between a few meetings at most, with most of the early (Q1:15) lift-off discussions off the table at the moment. For the market’s part, we are settling into a range once again, with the 10-year hovering around the 2.30-2.40% range, and the number of shorts willing to once again press the rising rate trade dwindling after the numerous failed attempts this year. Additionally, while we feel the economic data supports a real rate of return in excess of the 60 bps presently offered for the 10-year, any of the negative global economic data continues to support the continuation of central bank largess, which in turn has kept a lid on rising U.S. yields. We will point towards the fairly volatile moves around this range as an example of the continued debate and confusion over the next move from the Fed. The last and final meeting of the year is still over a month away (December 17), although we may get some insight into their thinking when the minutes from the October meeting are released next week.