Although further wash-between in the futures market is to be expected, participants bipolar mentality of quickly falling two steps back on disappointing news, then crawling one step forward between signals, continues to work towards slowly narrowing the expectation gap that exists between comparisons to more contemporary tightening cycles (i.e. the FOMC's dot plot projections), and the realities of where the markets reside in the long-term yield trough (see Here).
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This outlook is biased by our historic read of the long-term yield cycle, that implies that the potential reach of rate hikes will ultimately be realized to be much closer to current market conditions, than a return to normalcy achieved in previous cycles where the Fed and markets were not encumbered by the structural limitations inherent within the trough (i.e. destructive interference).
Similar to the "heads yields win, tails they rise" convictions prevalent by participants through the early downtrend in long-term yields in the first half of 2014; the dollar outlook has remained broadly bullish this year - despite the fact that the widely traded US dollar index peaked in early March and has retraced over 6 percent across the balance of the year.
The bottom line, however, is that along with the Fed's completion of QE and the significant move in the dollar, financial conditions have already tightened considerably under the radar since May 2013. This discreteness is representative of the challenges facing participants today in the trough of the long-term yield cycle, where expectations have largely been built around more contemporary comparisons. As such, we find long-term macro opportunities in the markets today extending from exploiting the fallacies of these comparisons, which at the very least we expect will incite mean reversions on a relative basis for markets pushed to extremes on both sides of the performance continuum. I.e., buying emerging markets and commodities relative to US equities and selling the US dollar versus a broad basket of currencies. In addition, on a relative performance basis we believe 5 year yields relative to 10 year yields peaked at the end of 2014, which in the past has indicated that the Fed is much closer to the end of its tightening regime than the beginning (Figure 4 and 14).