Concerns about the US inflation

Yesterday, we saw the FOMC meeting minutes and they delivered what the market expected. They held the rates unchanged and they confirmed that the process of balance sheet normalization will continue. The Fed highlighted the performance of the economy and the low unemployment. It’s true that the US economy is strong and the last GDP reading was better than expected. However, everything is not as the Fed would like it, and FOMC members expressed their concern about the inflation outlook. Let’s see how the markets reacted:

EURUSD December 2017 future

     Source: TradingView, EURUSD Dec17 future, 1 Hour

The Euro has been rising since the beginning of November. If we add to this trend the inflation concerns the result is a weaker dollar. We didn´t see a significant movement, the candle highlighted in yellow shows the upside movement after the FOMC minutes, as you can see the biggest movement was earlier in the morning.

10 Year T-Note December future

     Source: TradingView, 10 Year T-Note  Dec17 future, daily

Everytime that there is a negative outlook the bond futures raise, and this is what the 10Y T Note future did yesterday. I’ve been following for a while this contract and there is a clear triangle that if broken, I believe that it would go up to the resistance at 125.75.

2 Year T-Note December future

    Source: TradingView, 2 Year T-Note  Dec17 future, daily

In contrast with the 10 Year T-Note, the 2 Year T-Note hasn’t swung. The bearish trend is remarkable.

10 Year T-Note - 2 Year T-Note December spread

     Source: TradingView, 10 Year T-Note-2 Year T-Note Dec17 spread, daily

I’ve chosen to spread 1 contract of the 10 Year T-Note future versus 3 contracts of the 2 Year T-Notes. In my opinion is the best spread you can make with these two futures.

Yield between the 10 Year T-Note and the 2 Year T-Note

    Yield between the 10 Year T-Note and the 2 Year T-Note, source: St. Louis Fed

Historically this yield spread is an indicator or the recessions. We can see that it has narrowed during the last 4 years. This indicates the flattening of the interest rate curve.One of the reasons is the improvement of the US economy is pushing the short-term yields higher. The second reason is there is a strong buying pressure in the long maturities that doesn´t allow the yields to go up.

Conclusion

The Federal Open Market Committee statement doesn´t  significantly affect the markets if it delivers what the analysts expected. If it had been hawkish on the inflation outlook, we would have seen a strong bond selloff and buying pressure in the USD. The macro indicators are important but in trading is better to focus on the difference between the figure and the value expected by the market participants. I would use the yield spread introduced in this post for a medium or long-term investment. I will publish a strategy based on the yield spread between the US 10 year bond and the US 2 year bond in the future.

Have a good trading!!

Disclaimer

I wrote this article myself, and it expresses my own opinions that shouldn't be used as a trading advice. Trading carries considerable risk due to the high leverage involved