RJO FuturesCast

Daily Futures Market News, Commentary, & Insight

Fed Minutes are released today, with the front month Sep 30yr bond contract sitting near the top of the range it has been pinned within for the past six months. Currently the Sep futures contract is trading 145’10, up 10 ticks.  Below is a daily chart that will illustrate this range.

Will the Fed show its hand going into the next FOMC?  Something to watch for in the Minutes is what the Fed considers a neutral rate that neither stimulates nor constrains the economy.  According to Reuters, Federal Reserve Bank of Dallas, Robert Kaplan has stated that he thinks three to four more hikes should put short-term rates in the 2.5-2.75 area, which he believes will be neutral.  The reason the neutral rate is important to pin down is because this is where the Fed is expected to pause its gradual rate hike policy.  The probabilities of a September Fed Funds hike stands at 96%, with an additional December hike at 63% according to the CME. Additionally, discussions of the yield curve may be on the table, as many economists believe a flattening of the curve portends recession.  We have seen short-term rates rise at a much faster pace than long-term rates.  Also, it will be interesting to see if the Fed mentions trade policy, and what effect they believe trade wars may have on the economy. 

This range has been a common theme in the last several articles I’ve written. Fundamentally, if a market is in a range, it conveys that it is in a holding pattern until a catalyst moves it out of the range.  The reason I keep harping on the range, is that it is one of the best technical trading patterns to trade.  A range is not always clearly defined, and it takes some eyeballing.  However, once you identify the range, it is much easier to pull the trigger on trades.  This is because the range gives you entry and exit points and offers risk parameters.  A picture is painted for you in which sellers have painted the highs, and buyers have painted the lows in the prevailing range.  The six-month range is between the 140 handle and 146 handle.  The three-month range is tighter, between 142 and 146.  As we are much closer to the top of the range, it makes sense to get short exposure with stops above the high mark in the range.  This short exposure can be attained with futures or options depending on risk tolerance and profit objectives.

T-Bond Sep ’18 Daily Chart

T-Bond Sep '18 Daily Chart

Tarik Husseini