US GOVTS OUTLOOK: Contemplative session; a tight supportive range


BOSTON, Apr 21 (IFR) -

•	Market Seen as Keeping Its Hard Down Into Weekend's Event Risk

•	Weighing the Probable Forces Behind Next Range Break

•	Persistent Policy Divergence a Hamstring

•	Fed Kashkari, Markit Manufacturing and Service PMI's, Home Sales

Markets are once again bracing for a bout of sound and fury come this weekend's
French presidential elections, if not yet sure of what its significance will be.
Under such qualms or misgivings, the tried and true market approach is to adopt
the stance of discretion over valor and stand aside out of any harm's way.  Such
a market approach tends to favor the market's bid side as would be sellers are
often the one's to first stand down leaving buyers as the ones having to fend
for themselves.

With this, a modest grind higher within the range is seen as being the session's
better trading prospect. That it is a Friday, though, does bring with it the
potential for some rate lock selling for next week's new issue corporate
pipeline.  Either way, market volumes and consequent liquidity are seen as
likely to be light and compromised.

Under this shadow the market will have time to turn introspective and weigh
potential factors that could motivate the next range break what its direction
and ultimate destination will be. As recently postulated, all market roads
eventually lead back to the economy and its inflation metrics.

The past few weeks have already seen a major market reassessment and dialing
down of expectations. This was mainly seen as a dialing back of both the timing
and the likely impact of the administration's fiscal agenda - taxes, regulation,
infrastructure spending. Leading into the health care reform effort, it appeared
to be assumed that given the Republican White House and their control of both
the House and Senate that they would be able to quickly and seamlessly sail
though near whatever legislation desired.

A chicken in every pot and two cars in every garage was just around the corner
and with it an inflationary surge in economic activity. Markets got on board for
the ride. The ride though has been derailed mainly by partisan bickering and a
fair share of it within the Republican party itself. This schism  is now seen as
throwing everything up in the air and the assumptions of smooth sailing out the

For bonds it also activated the "when in doubt, get out" clause resulting in the
recent sharp short-covering rally. Where the fiscal initiatives go from here is
hard to say if safe enough exhort that unrequited bonds will be once bitten once
shy. From what can be seen the Administration is back talking a big game with
Treasury Secretary Mnuchin and chief economic advisor Cohn both on the airwaves
yesterday pledging that the President's fiscal/economic agenda remains alive and
well and that the sought-after legislation  will be forthcoming in fairly short

The markets can be expected to be from Missouri on this or believe it when they
see it rather than preempt it like before. The next litmus test is seen as
possibly coming as early as next week with chatter that the sought after health
care reform legislation will be brought back/up for a vote. Besides its
potential passage, the market too will be interested in how watered down the
legislation may be as an indication of the scope (or not) of future legislation
on tax reform and infrastructure spending et al. As said, the market is dialing
back its expectations here and in the process has thinned the ranks of market
bears while padding the positions of the bulls.

Bulls too continue to get assists from overseas central banks that are seen
clinging hard to the extraordinary accommodative policies. Indeed, BoJ governor
Kuroda interviewed yesterday said they have no intention of ending their yield
curve control/bond purchases anytime soon. With the yield differentials between
treasuries and JGB's near an historic wide the prospect is that US dollar fixed
income paper will better attract Japanese flow of funds than not. This too is
seen as the case for Europe, if to a lesser extent with perhaps some changes
seen in the wind, mainly as Germany rails against the ECB persisting with
extraordinary policies. So far, ECB President Draghi and company are
successfully pushing back against these notions if the space bears close
watching. For treasuries to break to higher yields they will likely need
European yields to come along.

Alas, it remains a hamstrung world out there with policy controls and other
impediments - mainly geopolitics - constraining the trade. For now, the deck is
seen as better stacked in favor of market bulls though there is scope - fiscal
agenda, reduction in geopolitical tensions - for that dynamic to change.
Sunday's French elections are seen as part and parcel to it all depending on its
outcome.  A strong showing for the euro-skeptics - Le Pen and Melenchon --
would be viewed as a step back for the economies and markets and vice versa.

Either way, with trading into perceived high risk event above most pay grades
the expectation is for a supportive contained range session with prices likely
to grind a bit higher. The tactical bias is neutral favoring the selling of
strength if in a low risk-profile manner as the market is still seen as held
hostage by the French election into the weekend. Look for a 2.27% to 2.22% range
in 10s. The strategic bias is flat after covering  a 50% short position in the
3-year from 1.41% at 1.406%. The curve bias is flat though currently favors
defensive steepeners

In regards to the session's data and events, pretty much everything the market
needs to know it will get in the span of 30 minutes. At 09:30 Minneapolis Fed
President Kashkari (voter, dissenting dove) will participate in a
question-and-answer session as part of the Hamline University Community Economic
Development Symposium being held in St. Paul, MN.

At 09:45, Markit releases its flash April PMIs for both the manufacturing and
services sectors. From the final March readings, economists surveyed by Reuters
expect the Manufacturing PMI to rise 0.2-point to 53.5 and the Services PMI to
increase 0.2-point to 53.0. At 10:00, the National Association of Realtors will
report Existing Home Sales for March, forecast to have risen 2.5% m/m to a 5.60
mn seasonally adjusted annual rate. The only other data release on the day is
the Baker Hughes weekly rig count, last showing 683 active oil rigs, an increase
of 11 over the prior week and 332 over the same week a year ago.

There are no Treasury or Agency MBS issuance activities scheduled. The New York
Fed will purchase up to $975 mn of 30-year Ginnie Mae securities in a FedTrade
operation closing at 11:45.


This article appears in: Stocks , World Markets , Politics

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