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The Most Important Market No One Is Watching


You can't have stronger nominal growth and lower interest rates. When the market begins to discount may be anyone's guess, but it will most certainly show up in the bond market.

MINYANVILLE ORIGINAL Last week's bond market price action in the long end of the curve against a stock market that still wanted to rally despite deteriorating fundamentals could be a harbinger of things to come if and when the Fed launches QE III. The stock market seemed oblivious to the headlines while the bond market traded with insane volatility.

Tuesday we got yet another ISM print that showed contraction in the manufacturing sector with an even more troubling inventory to sales ratio. Ho hum. Wednesday the ECB leaked Mario Draghi's open-ended bond-buying program. Blah blah. Thursday we got a much stronger than expected ADP report alongside better unemployment claims, and pre-open, the stock market seemed to just take it in stride. Whatever.

The bond market, on the other hand, was under pressure. US bond futures were slicing through the key 150-00 pivot down over a full point. Then when the bell actually rang stocks got the message and were off to the races with the S&P 500 (^GSPC) rallying 30 handles on the day eventually closing at new cycle highs at 1432.

The bond market was clearly anticipating and positioning for a big non-farm payroll number on Friday. Pre-open the long bond yield was up 6bps and bond futures were down another point to 148-16. Then the NFP data hit with a resounding thud. The data was so weak you couldn't even count on the perma bull cheerleaders to paint any lipstick on the pig. It was truly horrendous.

The bond market quickly turned with the US bond futures gapping higher by 1.5 points. Stocks, on the other hand, barely budged. It was like they weren't even awake. I think the S&P futures were down like five handles at the lows. Bond futures, however, were jamming higher, and by the time stocks were opening, were approaching the 151-00 level almost 2.5 points higher than pre the NFP release. When stocks opened and just shrugged off the data, bonds suddenly found no bid and reversed lower.

By lunchtime the bond contract traded all the way back down to the 149-16 level basically where it closed on Thursday. The S&P finished the day up five to close at a new cycle high just shy of 1438 while the bond contract settled at 149-09 just off the afternoon lows and below Thursday's close.
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