"...And she went on planning to herself how she would manage it." Alice in Wonderland, Lewis Carroll
The capital markets' extreme gyrations are tending to signal position reduction and counter intuitive price action. More weak economic data spiked bond yields lower and stock indexes lower. The anticipated "risk on" celebration of a debt deal ran head on into the ongoing European charade. Italy was in capital flight mode today. The US note market should see some profit taking but remains structurally un-shortable, for now.
The very short end of the curve remains a mess. Fed Funds, Repo, Bills and OIS have broken away from the catatonic state of the ZIRP. The market is grappling with a tricky question: Are there too many dollars out there, or too few? Clearly, when needed, the latter. The conventional wisdom, since June, is "its temporary." Last month's unemployment data was the last turning point for many on rate structures. A reduction in exposure into ADP and this Friday is to be expected. We would avoid extrapolating that price action into macro causality.