The market hype is rising over the Fed

When we usually talk about squeezes we talk about one side of a trade squeezing the other. It's normal market dynamics that when the buyers or the sellers damage one or the other there's a point at which they the pain becomes too much and that side breaks

A different type of squeeze happens when we trade big events. There's usually 3 parts to big events. Let's look at the Fed and rates

  1. We trade the expectation before the event
  2. We trade the event when it happens
  3. We trade after the event

The squeeze doesn't come from two sides of the market fighting each other, it comes from guessing the Fed and it comes from the market herd trying to nail that pot of gold at the end of the rainbow, i.e when that first hike will be

Trading in the Treasury market summed it up today. Treasuries went bid across the board and traders note that the market completely switched sides after the ECI data. That's not a squeeze, that's herd mentality

The squeeze is coming because we're getting near to when the market thinks rates will rise. Bigger emphasis is going to be placed on the data. The FOMC statement on jobs has heaped pressure on to next weeks Non-farm payrolls report.

MNI spoke to a bond trader who was speaking about the curve, and emphasised the point above;

"We're going to move around with the data" amid the knowledge that every Fed meeting is "live," with likely wild market action to occur around the July jobs report out next Friday.
"If the Friday jobs report is a blockbuster, we'll flatten, as the Fed (rate hike) is back in play," "But, today is about taking some of the Fed hike pricing out" amid soft ECI. "But if the Friday jobs report is weak, we will steepen,"

The expectations and the market's need to be facing the right way when it happens going to start reaching fever pitch. It may have done so already. Every data point is now going to be scrutinised and traded on with greater gusto as the market tries to get it right.

With summer trading to add into the mix it means we're likely to start seeing quiet periods interspersed with moves like we saw today, at data points. It's going to mean we'll need to be nimble and ready for position busting moves

This is one of those times when the market needs to be careful about what it wished for