Good morning / afternoon / evening - please choose whichever one which best describes when ever it may be that YOU are stumbling across this weekends 2nd note.
I wanted to reach out and mention something I neglected to mention in YESTERDAYs’, note (HERE) …
Friday night, just after 6p on the East coast, this hit the inbox,
HERE is the full press release for posterity sake … I will say that I’m not making mention in effort to make a mountain out of a mole hill but rather a note as I’m currently grateful there hasn’t yet been any avalanche of press releases given the amount of UST market vol as of late …
I do believe there are going to be more casualties out there and at the same time I also believe the ‘next’ crisis will NOT be the same as the last. I also continue to believe that those who do not learn from history are doomed to repeat it…
That in mind, there are several reasons to read up on the current narrative machine and those who operate it as they’ve been hard at work … I’d specifically note / lean on these slides from ROSIE
The twin engines of supply and resilient data broke in a comparatively supportive way for duration last week. We will be watching this week’s Treasury auctions carefully, as they are the next test of the market’s appetite for larger issue sizes.
In FX, we believe the current setup is ripe for a return of carry strategies. We added a carry basket to the strategy portfolio last week.
Q3 earnings season has been mixed. Looking ahead, we like positioning in long GenAI versus short traditional semis.
… not only was the headline number softer than expected, but there were -101k of downward revisions to the prior two months, the unemployment rate rose a tenth (despite a drop in participation), average hourly earnings moderated and the average workweek shrunk. What this means is that aggregate employment income (the product of aggregate hours worked and average hourly earnings) continues to moderate (Figure 1). A slowing of US growth back toward trend supports the Fed’s dovish tone last week and suggests that the long and variable lags of monetary policy may finally be beginning to bite.
… where we are less confident is in the durability of the rally in the back end of the curve. Not only was price action last week likely amplified by positioning-related buying, but the supply fundamentals have not materially changed for the better, in our view. Indeed, although the trajectory of supply at last week’s refunding announcement implies a slightly shallower path, we would note that the “surprise” is worth about $13bn less in 10y equivalents than what the market had expected for the quarter – only 2% of the $645bn 10y equivalents that Treasury will issue in the next three months. Further, auction sizes have more room to rise, meaning that once all is said and done, monthly Treasury issuance will have gone from a quarterly pace of about $543bn 10y equivalents in H1 2023 to $702bn by Q2 2024 (Figure 2). Taken together, while the news this week was a modest positive, it does not change the reality of materially more duration to the market, which we think ultimately argues for a degree of stickiness in the term premium reset. Accordingly, we continue to hold 3s10s steepeners in the strategy portfolio. This week’s auctions of $40bn 10s (Wednesday) and $24bn 30s (Thursday) will need to be watched carefully, as they are the next test of the market’s appetite for larger issue sizes.
MS - Sunday Start | What's Next in Global Macro: A Data Rorschach Test
For the US economy right now, whatever outlook you have is visible in the data. The hard data versus soft data schism was in stark relief in 3Q: GDP was 4.9%, while ISM stayed below 50 and measures of consumer and business confidence were adrift. October nonfarm payrolls surprised to the downside but the three-month moving average remains elevated. The data can support any view of the economy. We have maintained our view that the US economy avoids recession but slows as monetary policy restrains demand, and yet so far you have to squint to see the slowing. The rates selloff since the summer shows that the market has moved away from a recession narrative, but we think another shift in expectations could be under way, and a soft landing will always bring contradictory data – a slowdown but no recession.
The banking stress in March was a strong reminder that the Fed is trying to orchestrate tighter financial conditions. More recently, monetary policy and the market joined forces to push rates up faster than we have seen in decades. Part of the economic deceleration that we expect in 4Q and into 1Q24 will result from that tightening, but a softer tone to the data will also pull longer-term yields down. There will be an ebb and a flow in the data…
… The jobs data again show a mixed view. The year-and-a-half downward trend in NFP has been interrupted at times by strong readings: July 2022, January 2023, May 2023, and September 2023 were sharp upside surprises that then gave way to the trend. Most recently, government employment, especially for state and local education, was particularly strong. After this recent burst in state and local jobs we are finally back to the pre-Covid level, suggesting modest future support. While I cannot spin the jobs data as weak, the numbers in and of themselves do not change the outlook, particularly when strong jobs are accompanied by softening wages…
… So, is the glass half full or half empty? The answer is clearly “yes.” To get a soft landing, the Fed needs the economy to slow to a pace below its potential and is engineering that slowdown through higher interest rates. But for decades, slower growth brought sharply lower rates, instead of higher rates causing the slowing. The economy and the market are facing crosscurrents. We think the economy is set up to weather the storm, but investors need to be prepared for a slew of mixed messages …
Mixed messages, indeed and so it goes … before hitting SEND and heading off to breakfast with the NFL, a daily check in on the belly of the UST curve,
Point being to note that on a DAILY basis, the moves nothing short of stunning and so, for the shorter-term view these likely make better rentals than BUYS and HOPEFULLY in the days / week just ahead (JPOW speaking Thursday just AFTER all the Hobbit puts the FUN in reFUNding supply), there’ll be some sorta ‘concession’.
CONCESSION is NOT the end of the world but I’d rather put MY chips in VOL bets rather than any directional ones.
I’m ready / willing / able to consider whatever Mr. Market throws at us and hopefully you are too!
Before hitting SEND
Bloomberg- Bond Traders on Collision Course With Higher-for-Longer Mantra
Investors ramp up bets on interest-rate cuts in US, Europe
Skepticism grows over policymakers’ hawkish messaging
Bond investors and rates traders are increasingly betting interest-rate cuts will start by the summer, challenging policymakers’ mantra of high borrowing costs for the foreseeable future.
Markets are now wagering that the Federal Reserve will cut rates for the first time in June, and will have enacted almost 100 basis points of reductions by the end of 2024. A similar amount of cuts is priced from the European Central Bank, potentially starting as soon as April. And in the UK, the Bank of England is seen reducing the benchmark rate by close to 70 basis points.
That could prove a problem for central bankers, who’ve acknowledged the degree to which expectations for policy to remain tight have boosted bond yields, helping cool the economy.
“Officials will want to push back against this for as long as possible to avoid easing financial conditions,” said Henry Cook, senior economist at MUFG. If data continue to sour over the coming months — as Cook expects — the stance of central bankers “will become increasingly hard to maintain,” he said.
The pricing highlights market skepticism that’s set in after 2021 as central banks insisted inflation would prove transitory. For rate setters, the drop in bond yields threatens to ease financial conditions whether officials cut or not, undermining the impact of the hikes they’ve already delivered.
… ‘Self-Defeating’ There’s a danger the aggressive positioning could be their undoing. It wouldn’t be the first time they’ve been on the wrong side of the trade. Time and again this cycle, the market has either jumped the gun and called an end to the rate hikes too soon — or priced in tightening that rapidly looked excessive.
The US 10-year yield has dropped from 5% to 4.50% in less than two weeks on expectations that rate hikes are over. Just as Fed Chair Jerome Powell acknowledged last week that rising bond yields had helped policymakers, so central bankers are alert to signs that financial conditions may be easing too quickly.
Such an outcome “might be self-defeating and central banks might have to come out again strongly and try to reverse that,” said Vismara…
Bloomberg - Bond Market Has Fighting Chance to Avoid Historic Losing Streak
Yields sink from more than decade-high, trim bonds’ 2023 loss
Softening jobs market, Treasury debt plans alter market mood
A prospect that might have seemed unthinkable just a couple short weeks ago is coming into view for bond traders: The potential for US Treasuries to post an annual gain for the first time since 2020.
It’s well short of turning into ‘The Year of the Bond’ that many money managers expected entering 2023. But with this week’s remarkable about-face in the world’s biggest bond market, traders now have a sliver of hope that they can avoid an unprecedented three straight years of losses in Treasuries.
US government debt is coming off a weekly rally reminiscent of the market chaos of March 2020. Ten-year yields, a benchmark for global borrowing, fell about 25 basis points amid growing confidence that the Federal Reserve is done hiking interest rates, with the latest spark coming Friday on signs US job growth is cooling.
“The economic trajectory is lower,” said Gregory Faranello, head of US rates trading and strategy for AmeriVet Securities. “We’ve been looking for rates to correct lower.”
Faranello says he’s targeting a decline to 4.35% on the 10-year, from 4.57% now. It’s not even two weeks since the rate eclipsed 5% for the first time since 2007.
Even a flat year might be a welcome respite for bond investors, after Treasuries lost a record 12.5% in 2022, following a 2.3% hit the year before. A strategy of merely holding Treasury bills has earned about 4.2% this year.
The Bloomberg US Treasury index is still down 1.5% for this year through Thursday. But for bond bulls, that’s a move in the right direction after the gauge was down 3.3% for 2023 as of Oct. 19. Holders of 10-year notes would break even for this year if the yield finishes December at about 4.4%, according to data compiled by Bloomberg.
The outlook for bonds also brightened this week after the Treasury announced that it would lift debt issuance in the November-to-January period by less than many on Wall Street expected…
Yes, I agree, perfect !!!