What the Fed Cut Means for the Treasury Trade
Featuring Tony Greer
Published on: September 19th, 2019 • Duration: 17 minutesTony Greer, editor in chief of The Morning Navigator, breaks down the FOMC’s decision to cut interest rates and discusses why he thinks it’s business as usual for markets. In this interview with Alex Rosenberg, Greer walks through the recent spikes in both oil prices and the repo market respectively, highlights the trade war’s impact on the bond market, and reviews where he expects the 10-year Treasury note to head next. Filmed on September 18, 2019.
ALEX ROSENBERG: Welcome to Trade Ideas. I'm Alex Rosenberg, having great pleasure of sitting down with Tony Greer, editor-in-chief of The Morning Navigator. Tony, thank you so much for joining us once again.
TONY GREER: Thanks for having me.
ALEX ROSENBERG: We're sitting here after the Fed statement. The Fed cut a quarter of a percent as expected, and the market reaction so far, dollar up, rates up, stocks down, gold down-- seems like the market thought this was more hawkish somehow than they were anticipating.
TONY GREER: You could look at it that way. That's certainly a fair expression of what's going on. I'm a little bit more of the camp that this is a business as usual Fed meeting, in my opinion, aside from the repo issue. We're going to get to the repo issue in a minute but outside of that, you've got Powell coming out with the same old rhetoric, starting off with the US economy is fine. Then he starts and goes and mentions the risk to the recovery and when he mentions Brexit, I literally spit my soda out on my screen, because that's ridiculous. He goes into the basic rundown of how certain sectors of the economy are strong, certain are lagging et cetera, et cetera. It's the same story with Powell and I'm getting really tired of it.
Unfortunately, he's got the President breathing down his neck, and it shows like five minutes before his press conference, the President is bombing him with tweets saying he blew it. While this is unacceptable to most participants in the market, this is what we've got. What I think honestly, from this Fed meeting, and that this is very much going to be a business as usual and the markets in continuation. What I mean by that is something very specific.
The most important thing that I'm trading now is what I saw as the hairpin turn in the bond market. I don't think this Fed meeting is going to do anything to change that. At the end of August, Treasuries were rallying as sharply as they could. The yields are pounding the lows. This was one negative yielding rate vortex, it was sucking up all the yield in its path around the globe.
Now, we saw a reversal off of that, but what's within the price action of the reversal that's the most important to me. On September 3rd, I believe the US printed ISN Manufacturing at 49.1. Our manufacturing sector has now slipped into a slowdown. The bond market rallied that day and it made a new high. That was a bullish data point. Everybody in the world is looking for the bond market to continue on its path.
The bond market did a pause that day, yields put in a new low. In fact, the low of the move that day, I believe is at 1.45 or something like that in the 10-Year Yield, and then yields got back into their range. Then we got to the ECB meeting two weeks later in the middle of September and we had another super dovish, super friendly to the bond market commentary out of him. Bonds had every reason to get back on their horse and rally and they didn't.
In fact, that day bonds kept backing off, US 10-Year Yields broke up through their 50 -Day Moving Average and kept going. That's the move that I'm looking for. What we've seen just now in the first couple weeks of September is the bond markets have erased that big gigantic negative yielding rate vortex top they put in and erased all of those gains. Yields are back to where they were going into that month. I think we're just going to proceed now as follows.
With the bond market retracing with yields heading a little bit higher, everybody was so bullish, the bond market sentiment was massively bullish, everybody was looking for lower rates and rates stopped going down on a few data points that they should have continued lower on. I'm saying that that was the turn and now, we're going to see 10-Year Yields say back up into this 2 to 2.25 resistance level as the bond market continues to sell off.
What does it mean for stocks? Well, I think it means the same thing that I thought it meant after the last Fed meeting, which was their first rate cut, which was that Jerome Powell had his press conference afterward and contradicted himself within five minutes and it was a little bit sloppy. I thought after that, that that was a preemptive rate cut and the stock market should be business as usual. What happened the next morning, President Trump came with the tariff hammer. Now, we know that he's waiting for the Fed chairman to lower rates so that he can continue to put pressure on China, who in my opinion, is showing clear signs of cracking.
When we were coming, discussing the last round of tariffs that were supposed to take place into the end of the year, Trump came back and suspended him. He said, I'm concerned about the Christmas season. China came back and said, "Yeah, you know what, we're actually going to put tariffs on your ag products. We're going to put tariffs on this and that, and we're going to respond now." The fact that everybody thought China was playing this long game, and giving Xi Jinping all the credit in the world for outmasterminding the President, all of a sudden, he's responding to every little chess move that the President is making.
In my opinion, the fact that China thinks they're going to play a long game is insane because now, they've got their currency, they've got capital flight to worry about. They've got a Hong Kong issue to worry about, and they've got their currency up against the wall breaking out and going down. I think all of these things are going to play in, but coming out of the Fed, I've remained bullish stocks, I think yields are going to continue to bounce and the commodity market is a random number generator as of late. I'm trying to get a handle on what's going to happen but I wouldn't count commodities out here.
ALEX ROSENBERG: Well, let me ask you about bonds, specifically, because it's interesting. Yesterday, before the Fed meeting, Komal Sri-Kumar came on and he was talking about the Fed now as a lesser catalyst for bonds and ultimately, the trade war and to a certain extent, what happens geopolitically, especially with Hong Kong is going to impact that trade more. What do you think is going to be more impactful over the next year?
TONY GREER: I would agree with that. I would have to say that even after deciphering this meeting, and thinking that it's business as usual, I haven't pinned the bond market turns on the Fed. The bond market is generally responding to what the Fed's telling it but seeing as the Fed isn't causing any turns in the market, that's why I think we're going to see business as usual but I do agree with that point that as long as Trump continues, the tariff story is the bigger story. That's the one that's causing all of this reaction.
I think it's very important to follow that, very important to see if China-- how weak their economy gets, we've seen their manufacturing slow down, we see their stock market come off, we see their tech market come off their currency weaken. We have to see how they respond to this. I got a feeling that at some point, they're going to get a little bit more friendly and be posturing themselves a little bit more towards the President saying, "Okay, let's, let's wrap this up here. Let's come to a deal and decide what we're going to tax each other on and proceed global trade as usual."
I do agree with that, I think that the bond market is going to be driven a little bit by this rhetoric and more likely are actually have the economy response to the trade tariff war that's been going on. China looks like it's finally slowing down. Europe looks like a semi-disaster that could be heading into and the US is now obviously catching on to sneezing a little bit while the rest of the world's catching its cold.
ALEX ROSENBERG: In terms of the Fed policy path here, it's interesting. We had a very divided Fed on both the decision and on the docks indicating the forecast for the rest of the year. Now, we had you on last month or last Fed statement rather when they couldn't raise the first time and you said you were down with it, that's something they had to do based on what the rest of the world was doing with their central banks. What do you think right now, if you were in that room, what would you be arguing about both right now, and also for the rest of the year what the Fed ought to do?
TONY GREER: Okay, I would leave it as a data dependency thing. I would actually-- if I were the Fed, I would be doing a little bit of what the President's doing. Now, people aren't paying Real Vision subscribers to see what to think about what I would be doing as the Fed. The President is doing this protectionist thing. I feel like the Federal Reserve would be looking us as our own entity a little more. I don't want to hear him blaming things on the rest of the world, because we've got our own pockets of our own local economies that are literally going like gangbusters.
The tech world is on fire. There are a lot of places that transportation market is strong. There's a lot of places you could point to and say, "Yeah, this area, the economy is okay." I would say I would want to make it completely US data dependent. I would start throwing out my commentary about that we've got this wavering in China manufacturing. I would stop mentioning this Brexit bullshit between you and I. I'm really sorry but their economy is barely big enough to affect the global economy as it is and whether or not they're a member of the EU, I don't think it's going to have that big of an impact.
We're going to keep plowing ahead. I would be saying, "Look, we are focused on US GDP growth, on sparking or at least meeting our inflation targets. We're going to do everything that we can to do that here." That's not going to happen. You know what I mean? We're going to get a total-- we're going to get a Fed president that's obviously compromised-- a Fed chairman, excuse me, that's obviously compromised because I feel like he was still on the path of being a little bit more hawkish when he came into office. Then the President removed that whole entire idea. Now, that he keeps the pressure on him, I just don't like operating in a market with a Fed chairman that's so compromised.
ALEX ROSENBERG: Now, in terms of the trade, if you want to follow along and put on this trade, basically, the trade as you see it is that we've already seen the low in yields.
TONY GREER: For now, yeah.
ALEX ROSENBERG: Are you looking at TLT? How would you consider putting this on?
TONY GREER: To be honest, I've tried. I haven't put this on, because I've shorted the bond market and gotten burned on the way up when it paused at 2% in the 10-Year and so I'm not going to put bad money after good. My preferred method of choice is IEF, the ETF which is captures around I think the 7-10 Year Note performance. That's just a good ETF that you're doing the same thing to the ETF as you are to the bond market, shorting the ETF is shorting the bond market looking for rates to go higher.
That's my trade into the Halloween, Thanksgiving region. I think we're going to get there. I think bonds continue to sell off. I think I want to see, at least the bond bulls get put under a little bit of pressure. I agree with that, that looks like the direction that global rates are still heading lower. I feel like the bond market is still offside. I want to see this pullback continue. I still think that the stock market has got more of a chance to go up now then really break down. I really do.
We came through another pretty decent earning season. These are couple of problems on the tape, like FedEx, who's still complaining about the effect of the tariff war, actually. There are little pockets of problems like that but the sectoral rotation keeps adding up to a net positive for the S&P. You've got sectors now that are rallying on almost every move in the bond market like utilities.
Utilities have become part of the yield chase where they used to fluctuate versus Treasuries, and now, they fluctuate versus the rest of global yields, where people are saying, "You know what, I'm not going to go buy this crazy global yield, I'm just going to buy US utilities and clip 4%." It's we've got these rotating dynamics underneath the hood of the stock market. Like I said, at the end of the day, the deal still keeps coming out with net gain. I'm not going to get bearish in that scenario.
ALEX ROSENBERG: Now, speaking of, as you mentioned, the repo market, all the craziness that's going on there, some people say it's just a technical move, some people say it's a sign of a lack of liquidity. Where do you stand? What do you make of it?
TONY GREER: I think the most important thing about this repo story that's in the press now is the distinction to make between what went on in 2007 with the Lehman repo issue and what went on the last two days with this Fed issue. The Lehman repo issue was an issue of Lehman running out of securities to put up as collateral to get cash for to pay for their operations. This is totally different. Lehman was trying to put up securities that JP Morgan was having its analysts call back to the repo desk saying, "There's no bid for these securities, I can't even put a value on these and we're not taking them as collateral."
What happens then is word gets out that nobody wants to take JP Morgan's name, because they're putting up shit collateral. Then the whole thing goes seismic. This is not that. This is not that. This, it seems like the malfunction is on the Fed side, who simply failed to be able to have the funds available for these companies that are putting up collateral. Plus, with the Federal Reserve with like $1.5 trillion in reserves, I can't imagine that we're really going to have a problem where people don't know where they're going to get their next financing.
I'm watching the distinction. I think, if anything, the market panics a little bit, if this number continues to grow. We put up 53 billion yesterday, 75 billion today, if that number goes three figures, you're going to see some a quake no matter what because overnight, repo rate spiking like that is not normal market behavior for whatever the reason is. I think it's important to understand the distinction.
We're not in a people shutting off credit lines type of scenario, we're in a scenario where markets are going to lose faith in the operation of the Federal Reserve and the liquidity system. It's all about liquidity now, which is a little bit different than the Lehman one. I'm watching out for headlines just like everybody else, trying to learn with every day and watch the short term interest rates markets to look for a quake.
ALEX ROSENBERG: Finally, speaking of stories that are hard to understand, we'd be remiss if I didn't ask you about what's going on in the oil market. What a week for oil.
TONY GREER: Well, it's gotten interesting by the day in the oil market. A week and a half ago, my man Khalid Al-Falih was removed from his post. That immediately shakes me up, I'm sitting up in my chair, because the guy that was carrying the narrative as sensibly as he could, has been removed. That's after they decided to randomly remove the journalist off the face of the earth. I have officially stopped taking Saudi Arabia seriously and started treating them as a little bit of a global, bad guy.
We'll see what happens now in the wake of this attack. Their biggest oil facility in the world was attacked. I have a hard time believing that they really can't defend it with the amount of defense spending that they spend every year. There's a little bit of that tin foil hat stuff jumping out, but I understand Iran's position that they would want to provoke Saudi Arabia, cause unrest in the Middle East, spike the price of oil, cut off choke points, et cetera, et cetera.
My angle has been to try to play it from the long side and go with that breakout even though I know the world is planning for a recession and a demand slowdown and things like that. I know everybody's positioned for that, too. I've tried to play it from the bull side without much success so far, looks like the Saudi facility is going to be back online by the end of September, something like that. That's obviously going to alleviate everything that just went on in the last couple days but I'm going to continue to take swings at it because I think that oil is due for a $10 or $15 trend move. If I have to give up $1 here and there to try to figure out which direction that is, I'm okay doing that. I'm pretty neutral, but I'm looking to trade it.
ALEX ROSENBERG: Well, Tony, thanks for helping us make sense of oil. We hit a lot, the repo market, the unimportance of Brexit when it comes to the Fed, and how to make sense to this rate cut.
TONY GREER: Hopefully it was helpful, man.
ALEX ROSENBERG: Very good. Tony, thanks for joining us.
TONY GREER: Thanks very much, Alex.
ALEX ROSENBERG: Tony thinks the 10-Year Treasury yield could hit 2.25% over the next two months. As a result, he's looking at shorting the iShares 7-10 Year Treasury bond ETF, ticker symbol IEF.
My thanks to Tony and my thanks to you as well, the viewer. We probably not say this enough, but we really appreciate all of the suggestions, all of the comments, all the criticism, all the attention you give us when you watch, read, listen to what we do. You really help us to be our best. For that, on behalf of Real Vision and on behalf of myself, Alex Rosenberg, your editor-in-chief, I want to thank you. See you next time.