housing, positions, technicals and a (flattening) bias
In reverse order and in the inbox just after the housing data earlier today, I got this quick update / recap and a view from best in the biz…
Housing Data Improves on Multifamily; Weekly Charts Favor 5s/30s Flattening
Housing Starts in December surprised on the upside at 1702k vs. 1650k consensus and 1678k prior. Second highest since 2006 (beat by March 2021). The +1.4% MoM gain was on top of the November's +8.1% improvement. Multi-family drove the increase at +10.6% MoM vs. -2.3% in single family starts. Permits gained +9.1% for an annual pace of 1873k vs. 1717k Nov and 1703k anticipated - second highest since 2006, only topped by Jan of 2021. Again, multifamily surged +21.9% MoM while Single Family increased +2.0% MoM for the slowest monthly gain since September. Overall, a mixed read on housing that won't recast the macro narrative.
Ahead of the data, the Treasury market has edged back incrementally lower in yields; although the bulk of the selloff has been retained. We've attached a 5s/30s weekly chart as context for the relevance of the recent flattening and to highlight that not only would a weekly close at current levels be the lowest such mark since February 2019, it would also confirm the break of a long-term trendline that has been in place since 2018. Food for thought as the longer end appears poised to continue outperforming the Fed-linked-5-year sector. From here, we'll be watching the set-up for this afternoon's 20-year auction with a nod to the fact a more meaningful outright concession would aid the underwriting process
In that kills a couple birds with a single stone — fundamentals and technicals — I thought a bit more on TECHS. First from yesterday, a report from First Boston
While the entire report worth a look, the chart of 10s clearly has everyone’s attention. This was noted yesterday and this chart populated a short while ago
Chart Of The Day: US10YR, more room to grow?
US10YR: Is currently trading around 1.86 after decisively breaking above horizontal resistance at 1.77%, the March 2021 high, after falling below it earlier this week. A second weekly close above this level could suggest price action could trade higher and test horizontal resistance at 1.97%, the November 2019 high.
Finally taking all this with a grain of salt and combining fundamentals with some technicals, the picture not yet clear until we get our arms around POSITIONS. For that, read THIS
Extended Shorts At Risk in USTs?
>>> UST - Short Side Profits: $73m shorts (19bps profits) vs $38m longs (33bps loss)
Into the cheapening we saw aggressive addition of new short risk in 10s and above ($17m / top 3 event) which is driving short positioning to start to look extended. We see positioning now moderately short ($36m) but little profit (short profits offset by long losses). However fast 1m positioning is now highly extended short (>95th percentile) and deeply in profit => risk/return become balanced.
In contrast in cash/swaps the flows have been broadly contrarian over the week with Banks buying into cheapening the dominate thematic (despite yesterday stop out blip). Meanwhile HF remains net short with the largest activity concentrated in curves (fading long end steepeners) and re-engaging in long swap spreads (into recent tightening).
So where are the largest risks? In the short-term setup (based on 1mt of flow) - is now highly extended short (at $56m / 95th percentile), highly skewed to shorts (90%) and deeply in-profit (15bps / 95th percentile) => we are in deeply oversold territory. Meanwhile in the longer term metrics there is no change in highly extended consensus flattener positions held in 2/10s.
Risk/return now balanced given the structural build of shorts as market prices in more than x4 rate hikes => short / flattening momentum with our focus on the short side - in FV/TY with critical level at 119-06/127-17 where short profits squeezed.
This outfit goes on to some details and I’ll spare you ALL but present a couple,
Historically fast 1mth positioning is now highly extended short and now close to the historical extremes (at more than $50m / >95th percentile and deeply in profit => tails of the distribution.
Bias for further cheapening now balanced given highly extended short in fast 1mth positioning with risk concentrated in the belly => short momentum yes but focus on levels where short profits squeezed... meanwhile in the longer term the consensus trade is flatteners which remains highly extended in 2/10s and in-profit below 100bps.
…Finally, across the Eurodollar strip we see extended short positioning in the whites / reds as market aggressively prices in further >4 rate hikes. These positions are deeply in profit by more than 30bps with the largest risk concentrated in Dec 22's. Short momentum yes, but clear focus on levels where short profits squeezed - in EDZ22 short profit under pressure above 98.74
Make of this what you will … After the selling, there’s going to HAVE to be a period of consolidation. SOME will declare victory and continuation of the rout to resume. Others will talk about something breaking with higher rates, but … ZH put it best
Whenever it is I’ve got it figured out, you’ll be the next to know, I promise…