Pre-FOMC Positioning Overview; Futures Short, Cash More Neutral

Various measures point to stretched short Tsy futures positioning ahead of today’s FOMC.

• Hedge fund net shorts in TU futures sit at record levels, per last week’s CFTC data.
• Net non-commercial futures positioning is short across the curve, to varying degrees.
• 2-Year yields closed above 5.00% on Tuesday, registering a fresh ’24 peak after the ECI data triggered the latest round of hawkish Fed repricing.
• Elsewhere, various CTA signals sit in maximum short territory for Tsys.
• However, there are some more balanced positioning measures out there, J.P.Morgan’s latest Tsy client survey saw active investors cover their shorts last week, with elevated neutral readings seen in both the active and total client surveys.
• Some of the divergence in futures and cash positioning indicators can be attributed to basis trades, but not all of it.
• Given the above set up and Friday’s example provided by the monthly PCE data (when notable short cover was seemingly triggered by a slightly dovish data outcome) any dovish surprises from Powell could have a pronounced market impact.
• Still, we note that recent rhetoric from Fed leadership and the evolution of the economic data lower the odds of a truly dovish outcome.
• Furthermore, the apparent largely neutral positioning in cash Tsys means that there is seemingly ample space for shorts to be added if the outcome warrants it.
• QT taper discussions present another potential focal point.
• Overall, Powell is expected to tilt more cautious on the inflation outlook than in previous appearances.
• Click for our full preview of the event. https://roar-assets-auto.rbl.ms/files/62377/FedPrevMay2024%20-%20Updated%20With%20Analysts.pdf