Good morning … RBA hiked ONLY 25bp overnight. From Governor Lowe’s statement
The cash rate has been increased substantially in a short period…The Board expects to increase interest rates further over the period ahead. It is closely monitoring the global economy, household spending and wage and price-setting behaviour.
Was this the ‘dovish’ surprise you thought it might be which associates with this mornings market moves? A PIVOT?
Remember, the higher stocks go and the lower rates go, the EASIER financial conditions get then the more the FED will tighten … here is a snapshot OF USTs as of 720a:
… HERE is what another shop says be behind the price action overnight…
… WHILE YOU SLEPT Treasuries are bull-steepening on solid 140% volumes amid further risk(-parity) on conditions, NK missile news and reactions short-lived, Asia markets (that were open) trading firm (MSCI A-Pac +2%, NKY +3%, ASX +3.6%) on the dovish RBA surprise (25bp hike vs 44bps priced in). Aussie FI unsurprisingly ripped on the announcement, with AUS 3-year yields ~30bps lower. EGBs and Gilts also continue to outperform USTs, the sharp core market curve-steepening accentuated by the BoE buyback results, which showed the bank rejected around £1.89bn in offers and only bought £22mn of bonds. USTs continue to see belly-outperformance with 2s5s10s -1.5bps, while 5s30s steepening has broken above former range resistance at -15.6bp. The DXY is weaker (-0.5%), while the commodity complex is trading firm (CL +0.8%, XB +1.6%, BCOMIN +1.3%) . SPX futures are showing +1.5% here at 6:30am.
… and for some MORE of the news you can use » IGMs Press Picks for today (4 Oct) to help weed thru the noise (some of which can be found over here at Finviz).
In as far as whatever is on Global Wall Streets minds and as Q4 gets underway, dunno ‘bout you but I’m happy to NOT see another report about how BAD markets were. That in mind,
Reports suggest that OPEC+ is considering a production cut at its meeting on Wednesday, October 5, potentially larger than 1 mb/d. While such a cut would occur amid one of the tightest markets in recorded history, and ahead of a potential decline in Russian exports later this year, such a decision could be justified by the recent large decline in prices, down 40% since their June peak, with mounting global growth concerns. The collapse in investor participation, driving liquidity and prices lower, is also a likely strong catalyst for such a cut, as it would increase the carry in oil and start to claw back investors who have instead turned to USD cash allocation following the aggressive Fed hikes. Such a cut, not assumed in our latest published balances, would reinforce our bullish price view while help limit the downside to prices should economic growth disappoint even relative to our cautious world exc. China 1% real GDP growth assumption for next year. As a result, we reiterate both our bullish oil view as well as our preference for long crude timespread positions into year-end.
The Global PMI data for September maintained its softening trend. While weakness became more apparent in some coincident indicators like output and key leading indicators like orders, the global employment index is still in regular midrange terrain. Since data was made available in 1998, total orders and export orders have been weaker than current numbers only 8% and 7% of the time, respectively. In contrast, the global employment subindex has been softer in 58% of the months covered since 1998.
Bespoke (on yesterday): Why Today Looked Different
… Looking more closely at stocks vs. bonds, below is the five-year total return of the S&P 500 (SPY) vs. the US aggregate bond market (AGG). Historically there has been an expectation that bonds would cushion the blow when stocks fall, but 2022 has been uniquely painful for both asset classes. WhileSPY has fallen more than 20% this year, it has still posted a total return of nearly 60% on a five-year basis. The bond market, on the other hand, is now negative over the last five years.
In this report, we evaluate a few yield spreads and their effectiveness at predicting recessions. We also predict the depth (i.e. mild versus severe) of a given recession based on the duration of yield curve inversion. Our preferred 10-year/1-year yield spread breached the recession-prediction threshold in August and remained negative through September, suggesting there is a 91% chance of a recession during the next 12 months.
And for our inner chartist here are a couple may be of interest.
T-Bond futures prices were in a well defined downtrend channel. The breakdown move below the lower boundary is now revealed to be a washout. Those who have waited for the decl. tops line to break as confirmation have to give up 2 points' gain Monday as price for that information.
This year has proved challenging for the classic 60/40 balanced portfolio, with the US equity/bond ratio trapped in a broad range as equities and bonds have sold-off together all year
High inflation has been the culprit in maintaining an unusually positive equity/bond correlation, however a top in US Inflation Expectations is signaling investors' confidence that US inflation may fall next year, which means the hedge value of bonds in multi-asset portfolios should start to return.
The US equity/bond ratio itself has fallen since mid-August after essentially being capped at the falling long-term 200-day average, which has been accompanied by a fresh downturn in weekly MACD momentum below zero. This suggests that we may be seeing a more decisive turn lower and a more sustainable downtrend as investors move out of equities further and finally start moving into bonds.
This shift from equities to bonds looks justified when we look at the individual components. For the S&P 500, we maintain a negative 3–6 month outlook for our 3235/3195 objective. For bonds, the completion of a medium-term top in 10yr US Inflation Breakevens suggests that we may getting closer to an important peak in nominal yields.
With this START of a shift in mind, a FI tactical / technical view — BULLISH 5s, 10s and BONDS, noting this on 10yy
… Near-term support moves to the 3.66/68% breakdown point, which now ideally caps. The next minor level is then seen at 3.86%. Whilst not our base case at present, we note that the next support on a closing breakout above 4.00% is at 4.10/115%, then much more importantly at 4.27/275%. … We turned tactically bullish at support at 3.855% last week, with scope for a move to resistance at 3.51/50% initially. We see next support at 4.02%, above which we would turn tactically neutral.
Then THIS from AllStarCharts: Commodity Trend Rolls Over
(HOPE springs eternal)
Finally, with RTO and ‘face time’ noted this past weekend — important ‘toon consideration as we head straight in to some sort of recession — here’s what we’re likely to see, at least at the onset … called a ‘Hybrid Work’ situation
Get ready. It’s coming to a ‘theater’ near you and me soon … THAT is all for now. Off to the day job…
