EZ 'flation'; while we slept; QT and rates impact; equity risk pulse; CapX plans; groundhog's day -- the bad news; BoJo the clown
Good morning and happy Groundhogs Day (unless you are Mrs. Milltown Mel). I certainly HOPE she’s got GOOG shares in the estate account as it would seem those shares are single handedly lifting all equities (TECH clearly moreso than others) and yields, well, are giving them a 1-handed clap. Meanwhile, in RATES,
WHILE YOU SLEPT
Treasuries are sharply mixed with the curve a hair flatter ahead of today's ADP and Treasury refunding announcement events. DXY is notably lower (-0.45%) while front WTI futures are little changed. Asian stocks (China still on holiday) were solidly higher, EU and UK share markets are modestly higher while ES futures are showing +0.7% here at 6:45am. Our overnight US rates flows saw another quiet Asian session with light flows skewed toward curve flatteners from real$- flow that that sparked steepener interest from fast$. Overnight Treasury volume was very weak at ~45% of average with 2's (58%) seeing relatively 'standout' average turnover overnight.
AND some,
US News: According to Apartment List data for January, national rents increased by an 'unprecedented' 17.8% nationally AL The national debt has climbed above $30tln for the first time with federal borrowing rising close to $7tln since the end of 2019 CNN A big payments company warns on consumer spending- particularly a "pullback in spending by low income consumers" FXL A big coffee chain sees more price increases this year due to supply chain disruptions and a sharp rise in labor costs NYT Arabica coffee prices rose 76% in 2021, continuing higher since WSJ A 'normal' supply chain is unlikely in 2022 NYT
In as far as the rates 1-handed clap, a visual from the while-we-slept guys,
…Our next attachment is an updated look at 30yr nominals where 30yr rates have spent much of January tracing out a ' diamond ' pattern (initially higher highs and lower lows, followed by lower highs and higher lows of late) after a sharp, ~6 week up -move off their early December low below 1.70%. So similar price patterns in both and you can see this in lots of US rates benchmarks now- dropping hints that there may be more chapters to be read in this bear market tome still...
So next time kids say — DAD, I’m NEVER gonna use geometry in the real world, well, refer back to the above?
Meanwhile, in the EZ, some ‘flation figures crossed and Nordea recaps,
Euro-area inflation: another surprise to the upside
Headline inflation at 5.1% and core inflation at 2.3% were clearly higher than expected, again. Although energy still dominates the headline numbers, wider price pressures are accumulating.
Turning to a large German bank who’s ever popular strategist continues along working from home after his recent knee surgery, offering THIS,
…Overnight in Asia, several equity markets remain closed for the Lunar New Year holiday, including China and South Korea. However, the Nikkei (+1.65%) is trading higher this morning, extending its gains into a 4th consecutive session. Elsewhere, Australia’s S&P/ASX 200 (+1.24%) is trading in the green after the RBA Governor Philip Lowe watered down speculation of imminent rate hike in his speech today. Lowe reiterated that the end of money printing does not mean the central bank will swiftly move on interest rates while acknowledging that inflation has risen faster than the RBA had expected. Looking ahead, US stock futures are trading higher with contracts on the Nasdaq 100 (+1.07%) higher following strong earnings number from Alphabet, whilst S&P 500 futures are up +0.52%…
And for some more of the news you can use » IGMs Press Picks for today (1st FEB) to help weed thru the noise (some of which can be found over here at Finviz).
In as far as some other notes / thoughts / views which may be of interest, Goldilocks,
Quantitative tightening and its rates market impacts
■Our baseline assumption for the Fed's balance sheet runoff—a June announcement with a quick ramp up to a peak level of $100bn/month ($60bn UST/$40bn MBS)—should translate to about a $2.2-$2.7tn reduction in the balance sheet size over a 2-2.5 year period. We expect Treasury will replace this lost financing of USTs by leaning heavily on bills, but also by leaving coupon auction sizes a bit above our prior projection.■We believe the stock effect of the balance sheet unwind on 10y yields should be ~20-30bp, and potentially smaller if Treasury relies heavily on bills. We also expect minimal flow effects as duration supply to the public is likely to increase only modestly. Taking the UST and MBS portions together, we expect the market will be faced with a fairly modest $10-15bn upshift in 10y equivalent supply per month compared to the pre-taper norm.
■QT could have a more significant impact on relative value metrics in the Treasury market. We expect wider on-the-run/off-the-run spreads, tighter front end swap spreads, wider futures bases, and higher yield dispersion metrics. We also expect a deterioration of liquidity measures such as market depth, and a higher level of rate vol on average.
■On the liability side, lower reserves and RRP facility balances should reflect the shrinking balance sheet, though the latter is likely to see more initial depletion—our base case is for about a 35/65 reserve/RRP depletion ratio, though there is considerable uncertainty on this front. The SRF's current incarnation is unlikely to materially lower the minimum level of desired reserves.
■The depletion of excess reserves should result in upward pressure on short term rates, though we believe this will be much more pronounced in 2023 than in 2022. Our projections for reserve balances, bill issuance, and sources of UST demand, imply ~5bp of upward pressure on fed funds and ~9bn on SOFR versus IOER by YE23. We expect 4-5bp of Bills-OIS widening over the same period. These projections are most sensitive to our assumption that levered investors will, over time, replace the Fed as the marginal buyer of USTs. We do not expect QT to materially affect cross-currency bases.
As far as stonks go, well, Barclays inboxed this ‘risk pulse’,
Bearish Retail but Bullish Professionals
Markets remain volatile with retail flows and sentiment turning bearish. However, institutional investors are buying the dip. Moves are likely being exacerbated by option market maker hedging activity in thin markets. We continue to think that risks are skewed to the downside.
Be sure to check out slide on p10, “Bubble Mania” … And as go some of these markets, so to goes CapEX plans, at least to some degree and according TO MS,
Capex Plans Index: Losing Some Steam
Our composite Capex Plans Index fell in January for the second consecutive month, but remains elevated. Supply side issues continue to weigh on the manufacturing sector, but capex is poised to remain a driver of GDP growth this year and next.
CapEX plans, they say, are a forward looking indicator as businesses plan for the future. There are other,
Warning signs on the horizon?
ISM manufacturing looks set to fall furtherThe US ISM manufacturing index fell again in January and there are warning signs of further falls on the horizon. The detailed forward-looking indicators from the Philly Fed survey suggest the ISM index could continue to decline by much further in the coming months, implying softer manufacturing growth will drag US GDP growth down with it. If that occurs, then expectations for corporate earnings growth could also be cut, at just the time when many investors are hoping that stronger earnings will offset the negative impact of rising interest rates…
Omicron only? They say HOPE isn’t a strategy but lets go with it for now.
Speaking of HOPE, it is Groundhogs Day and with a deep freeze settling into the the south and south west just as all eyes are on Milltown Mel (the NJ groundhog that matters most to those of us residing in The Garden State), well, there’s just no easy way to say this so …
Weather predicting Milltown Mel dies just before Groundhog Day
A weather-predicting groundhog died just before his annual big day, Groundhog Day. It is a day when tradition holds that if a groundhog sees its shadow, we can expect six more weeks of winter. If the groundhog doesn't see its shadow, an early Spring is predicted.Milltown Mel's death was announced on a Facebook page set up for him…
I could go on but the thought of it all, well, it’s just too difficult. Given the set of facts, one can draw only one conclusion. Winter will then go on FOREVER. Spring will never again be sprung.
The good news is it’s not the ONLY groundhog in the biz but the bad news about Punxsutawney Phil is, well …
Embracing the cold weather, learning to bend with the knees while shoveling as it is gonna be with us for some time (perhaps ALL time) ahead and for whatever reason, I couldn’t let BoJo the Clown slide by underneath the radar,
… that’s all for now. Off to the day job…