Good morning … over past several days we’ve had central bank intervention in FX and rates markets while all sorts of rumors unsked meetings CONTINUE flyin’ around because, well, financial markets instability and single bank names … CNBC,
Not sure how we’ll top all THAT but this week does end with NFP and in the meanwhile, here is a snapshot OF USTs as of 715a:
… HEREis what another shop says be behind the price action overnight…
… WHILE YOU SLEPT Treasuries are firmly bull-steepening from Friday’s closes, low volumes likely exacerbating front-end demand seen in Asia, while the UK’s decision to walk-back top-earner tax cuts has underpinned a core market bid since the London open. Similarly, modest weakness in German/EZ PMIs sees a risk-off tone prevailing (SPX fut’s flat, DAX -0.8%, SX7E -1.2%, FTSE MB -0.5%, DXY +0.2%). OPEC ‘sources’ suggesting a >1m/bpd cut at the OCT 5th meeting has the energy complex ebullient ( CL +4%, XB +4.5%, BCOM +0.4%), but US TIPS breakevens remain unchanged after last week’s weakness (5y BE -20bps last week). Flows overnight were exceedingly light after a very mild month-end experience (OI data suggesting small new longs across the curve and long liquidation in 30y ~$1. 5m /01). Our London desk reports some payers of 5y ASW vs FM receiving 2s5s10s in the early morning.
… Citi’s Dr. Mo also shared a graphic gem over the weekend, the SPX vs Global Bank Balance Sheets (CGCTGBAL), suggesting the 25% contraction in global liquidity is only an appetizer, a regression analysis suggesting the SPX could fall below 3220, and potentially as low as 2900
… and for some MORE of the news you can use » IGMs Press Picks for today (3 Oct) to help weed thru the noise (some of which can be found over here at Finviz).
As far as what Global Wall Street is saying / thinking / selling and in addition TO what was noted HERE yesterday,
Financial markets show real signs of stress, as currencies and rates hit critical thresholds and force policy interventions even in core markets
… Solid incoming data in the US continue to pose upside risks to the terminal policy rate. We recommend shorting the front end and maintain our flattener views. In the euro area, we see higher outright yields and wider peripheral spreads as the path of least resistance. The pensions-linked squeeze in the UK triggered a sharp repricing of interest rate volatility, while hitting vol-sensitive assets, such as MBS. We doubt that a similar event could lead to a de-anchoring of the long end in the US.
This week's US jobs report (Fri) may be even more critical than usual, given Fed chair Powell's explicit mention of labour market indicators at last month's FOMC meeting. We expect 250k in nonfarm payrolls, steady unemployment and participation rates, and average hourly earnings to move up 0.4% m/m (5.0% y/y). A strong report could drive the market to fully price a 75bp rate hike in November, further supporting the USD…
Barclays noted separately markets are,
Taking a breather The macro outlook looks poor, with the Fed vowing to press on, UK markets in turmoil, and many central banks intervening to defend currencies. But sentiment is so negative that a short bounce is very possible as relentless selling takes a breather; we turn tactically neutral on risk assets.
… Which assets saw the biggest losses in Q3? … Sovereign Bonds: Persistent inflation and more hawkish central banks than expected meant that sovereign bonds had another poor quarterly performance. Gilts (-14.0%) were the worst affected given the market turmoil in the UK, although both US Treasuries (-4.4%) and European sovereigns (-5.1%) still lost significant ground. Combined with the losses over Q1 and Q2, that brings the YTD decline for US Treasuries to -13.4%, and for European sovereigns to -16.7%.
And another visual RECAP of sorts, this time from BBG specifically on 10yy
Treasury 10-year yields are surging relentlessly higher in a way rarely seen. They just climbed for a ninth-straight week, the longest such streak since early 1994, jumping 1.18 percentage points in that time. That bond sell-off is only the most savage move since the April-May rout that sent yields up 1.4 points in a nine-week span, but its persistence is noticeable.
The message is that the bond market has finally realized just how determined the Federal Reserve is about raising and raising and raising interest rates to contain and then cool inflation. Long streaks of weekly yield gains have tended to come around or just after the mid-point of tightening cycles, as well as at pivotal moments when the target rate is sitting at the bottom after rate cuts. That underscores the potential both that we get some sort of a rebound in bonds, and perhaps in other assets, though relief is likely to be short, and ultimately bittersweet.
That was then and a recap while this next (perhaps last today) view is an attempt to be more forward looking (and was hinted at HERE yesterday,
Fire and Ice remains in gear with M2 growth now into the danger zone where financial/economic stress occurs. While the Fed can fix this by restarting QE, it cannot stop the oncoming earnings recession. We remain bearish and sellers of rallies until EPS forecasts de-rate, and the price is right.
… We looked at the 4 largest economies in the world—the US, China, the Eurozone,and Japan—to gauge how much US dollar liquidity is tightening. More specifically, M2in US dollars for the big 4 is down approximately $4T from the peak in March (Exhibit 1). Furthermore, the year-over-year rate of change is now in negative territory for the first time since March 2015,a period that immediately preceded a global manufacturing recession. In our view, such tightness is unsustainable because it will lead to intolerable economic and financial stress,and the problem can be fixed by the Fed, if it so chooses. The first question to ask is, when does the US dollar become a US problem? Nobody knows, but more price action of the kind we’ve been experiencing will eventually get the Fed to back off. The second question to ask is, will slowing or ending QT be enough, or will the Fed need to restart QE? In our opinion, the answer may be the latter if one is looking for stocks to rebound sustainably (Exhibit 2), which leads us to the final point of this note—a Fed pivot is likely at some point given the trajectory of global M2(in USD). However, the timing is uncertain and won’t change the trajectory of earnings estimates, our primary concern for stocks at this point.
Earnings Remain Our Focus from Here…
ALSO an attempt at forward looking is THIS CHART from BAML via John Authers’ latest
…There’s much discussion of a possible bear market rally, and that seems reasonable. Compared to its own 200-day moving average, the S&P looks seriously oversold. This chart from Michael Hartnett of Bank of America Corp. shows that the market has come down so swiftly that at least a bounce seems very plausible:
Attempting (and failing miserably) to end on a high note and so … THAT is all for now. Off to the day job…
