Tepid Fed Remarks Create Potential For Profit

The positive durable goods report, citing new orders up 1.8% for May, fought the May new home sales numbers, below consensus at -0.6% (m/m), as conviction wavered among market movers throughout early trading Wednesday. The crux of the day's market moving news came in the form of the FOMC statement on Federal Reserve policy, where the committee unanimously decided to do... nothing. In a period where capital markets, more specifically Treasury bond traders, have been clawing for clarity, the Fed has decided to issue a statement virtually identical to the statement on April 29th. While Treasury yields have plateaued in the recent week or so, the supply issue concerning a gross $3 Trillion bond issuance over the course of 2009 amidst declining government revenues was holistically ignored.

Crude oil prices may finally be taking notes from reality as rising finished product inventories pulled prices further away from the $70/barrel high water mark amidst increases in refinery capacity and another large draw from crude inventories. The U.S. dollar index jumped higher as Treasury yields also climbed contrary to the price of crude and equity market averages. This relationship between the three suggests that the worsening economy amidst flight to quality and re-deflation trades may depict a new normal. Its natural for Treasury rates to rise until language from the U.S. government suggests a paring back of stimulus spending (unlikely given continuing demand destruction) or defines a strategy to protect the dollar. The relationship where the dollar rises alongside treasury yields will persist until inflation arrives. When this occurs, commodities and the dollar will flip flop back to their current "reflation" trade trends.

For now focus on what's simple. Demand is weak and jobs are scarce, ensuring that until we see a reversal of the price wars in the marketplace and more creative destruction, prices will remain low. The easiest thing to do here would be to go long the 10yr Treasury note rate through an ETF such as the PST which tracks the yield of 7-10 yr Treasuries. For something more exciting look into the DS Positions  which are coiled to spring.