o/n was, 'pretty dead' quiet in terms of UST volumes; mkts 'on the edge'; Fed leans hawkish, can earnings be an offset?
Bostic a non-voter SAID; NFP pre-cap; Foreign Demand for USTs in pandemic
Good morning. Lets jump right in with update from sellside and what happened overnight,
US News: Bostic: The Fed could go 50bp if inflation remains stubbornly high FT The Fed's tightening plan upends outlook for Treasury's bond sales BBG Retail investors go back into Blue Chips WSJ Inflation and deficits haven't yet dimmed the appeal of US Treasuries NYT Market volatility has begun curbing companies' ability to raise cash FT Rents are +40% in some US cities, forcing millions to find another place to live WaPo Aluminum (prices +24% in past 6mo) is potentially another 'pinch point' for industries such as auto manufacturing WSJ Covid cases among US West Coast dock workers top all of 2021's BBG The US plans sanctions on Putin's inner circle if he invades Ukraine FT
Treasuries are lower and the curve flatter ahead of month-end, Wednesday's Treasury refunding announcement and Friday's employment report. Bostic's weekend comment about the threat of 50bp (see first link up top) appears to have sparked the latest push flatter in curve. DXY is modestly lower (-0.15%) while front WTI futures are modestly higher (+0.5%). Asian stock markets that were open were mostly higher, EU and UK share markets are mixed/higher while ES futures are showing -0.25% here at 6:45am. Our overnight US rates flows saw Asian real$ buying in the long-end along with apparently opposing block trades in TU futures. London's morning flow was pretty dead according to colleagues there. Overnight Treasury volume was ~80% of average.
… UST 2s5s curve, daily: This curve has taken out a nearly year-long range support (~44.1bp) this morning... We'd spot the next important range support near 30.6bp- the late 2017 lows, the March 2020 highs and a cluster of weekly closing lows seen in early 2021.
AND then there’s the news you can use » IGMs Press Picks for today (30th Jan) to help weed thru the noise (some of which can be found over here at Finviz).
Here’s ZH version of what non-voting moderate from ‘hotLanta said about 50bps HIKE,
Atlanta Fed President Pours Gasoline On Fire With 50Bps Hike Comment, But There Are Reasons To Fade It
… But with futures set to open in just a few hours, we may get another sharp drop at 6pm ET when traders punt risk after yet another Fed official - we would say hawk but that's meaningless now that even the uber-doves have turned hawkish to appease Biden and his imploding approval rating...… In an interview with the Financial Times, Raphael Bostic, president of the Fed’s Atlanta branch, said the Fed could "supersize a rate increase to half a percentage point if inflation remains stubbornly high."
… He said, however, that he was closely monitoring overnight borrowing markets, in particular, for signs of stress akin to the episode in 2018 when financial markets seized up as the Fed tightened monetary policy further despite fears of a growth slowdown…
… Finally, even if the Fed is using Bostic's FT interview as a way to telegraph what is coming, there are almost two months until the March FOMC, and a lot can change by then, not least the next CPI print which if it comes (well) below expectations, will be viewed as a key dovish reversal by the market, especially if the current downbeat economic trends fail to reverse, pushing the economy straight into a contraction.
Now as far as a markets wrap goes, here’s all I’ve got:
CNBC: Stock futures mixed ahead of final January session; S&P heads for worst month since March 2020
RTRS: LIVE MARKETS Tightening cycle: no alarms and no surprises please
RTRS: U.S. public pension funds seen turning to more 'aggressive' investment
MarketWatch: Market corrections are good buying opportunities, says Goldman Sachs — but only when this happens
I’d also like to mention a few items which hit inbox AFTER sending along SELLSIDE OBSERVATIONS and weekly economic indicators yesterday.
First, a Macro House View WEEKLY update from Barclays,
On the edge
Markets are nervy, as the Fed endorses March lift-off and other major central banks mull their options …… Forecast Changes
… US: We docked our GDP forecasts to 1.5% q/q saar in Q1 (down 1.0pp) and 4.0% in Q2 (down 0.5pp) after larger-than-anticipated inventory accumulation in Q4. We also revised higher our CPI NSA index profile after a steady march higher in energy futures prices. On average, our path stands higher by 0.18 index points for 2022 and 0.17 points for 2023. US Outlook: FOMC data reactions may surprise, 28 Jan 2022; US Economics Research: US CPI profile revised higher on energy prices, 27 Jan 2022
Speaking of updating views, something from Goldilocks
Firmer Underlying Inflation, Faster Normalization
As most G10 central banks begin their hiking cycle, focus is turning to the speed of normalization and how long the ECB can remain on hold, both of which will depend on underlying inflation pressures and the outlook for sequential inflation. To assess underlying inflation pressures, we complement our statistical trimmed core measure with two new measures based on economic fundamentals … Taken together, this simple model and the reacceleration in sequential underlying inflation suggest that inflationary pressures have significantly firmed in western DMs. This is clearest in the UK and the US, where we have recently revised our forecasts to four and five hikes in 2022 respectively. Underlying inflation pressure is weaker in the Euro Area, consistent with our expectation that the ECB remains on hold for longer.
Here’s everyone’s favorite stock-jockey - Mike Wilson’s weekly - as he’s seems to be one who favors swimming against the tide, regardless of whether it’s pushing in or pulling out,
Weekly Warm-up: Fed Leans Hawkish as Earnings Try to Offset
The safety net of forward guidance from the Fed is gone just as earnings revisions and PMIs appear set to decelerate—an unattractive risk/reward set up. We remain sellers of rallies and of the view that S&P 500 fair value remains closer to 4,000 tactically. Stick with Defensives under the hood.Exhibit 1: S&P Continues to Struggle with 200-DMA
… Slowing growth (i.e., our ice narrative) is not a development markets are priced for, in our view...leveraging our equity risk premium framework and our ERP/PMI model, we take a look at fair value for the index if PMIs fall modestly to the mid-50s and rates stay stable in the near term. We find fair value to be 18x current forward EPS of $225, or a price level of ~4,000. Alternatively, even if the composite PMI stays around current levels, but rates push higher toward our strategists' 1Q target of 2% on the 10-year, implied fair value is still right around 4,000. If rates and the composite PMI both stay at current levels, implied fair value is ~4,400 or right around where we are currently trading. That's not our view, but it's a good check of our framework and suggests that we'd need to see lower rates and/or stable-to-slightly better PMIs (from near-record highs) to justify a higher index price level.
With this shorter-term chart in mind, here’s one with somewhat more context from ChartOfTheDay,
For some long-term, inflation-adjusted perspective -- Dow Since 1900
Another fan fav offering an early morning REID commenting on the weekends data from China,
… China’s manufacturing PMI dipped to 50.1 on release yesterday, just above the 50 expected. The non-manufacturing slipped to 51.1, also marginally above consensus. Asian stock markets are trading higher this morning amid thin trading with markets in China and South Korea closed for the Lunar New Year holiday. The Nikkei (+1.39%) is up, erasing its opening losses while the Hang Seng (+1.07%) is also in positive territory …
And finally, Swonk/GrantThornton on a roll, so here is her latest NFP pre-cap,
Employment Poised to Stall in January
Payroll employment is expected to flatline in January, as disruptions due to Omicron mount. A small gain in private sector employment is expected to offset a drop in public sector payrolls. A drop in the overall payroll figures cannot be ruled out.
This note on inflation from WFC seems funtertaining, too,
Inflation: Same Storm, Different Boats
The strongest inflation in nearly 40 years is presenting a significant challenge to all American households, but some consumers are being hit harder than others. The Consumer Price Index calculates the average change in prices across the average consumption basket. Yet spending patterns vary widely, leading to significantly different inflation experiences. To determine which groups have seen the sharpest rise in living costs this year, we construct unique CPIs based on the Consumer Expenditure Survey.
Finally, a Fed note which may / may not be of interest,
Foreign Demand for U.S. Treasury Securities during the Pandemic
Abstract: Foreign investors hold a sizable amount of U.S. Treasury securities—$7.5 trillion or about 35 percent of the total outstanding—so net purchases by foreign investors receive significant attention from a variety of sources, including academic researchers, finance professionals, and journalists. During the pandemic, foreign demand for U.S. Treasury securities has received scrutiny for a variety of reasons, including the contribution of foreign investors to the massive selloff in March 2020 (Duffie, 2020; Vissing-Jorgensen, forthcoming) and the ability of foreign investors to absorb additional Treasury securities as the Federal Reserve prepares to taper its asset purchases (Duguid and Rennison, 2021).
Finally, as we end January and think ahead to FRIDAYS NFP, given all the scapegoating and excusing due to OMI that is going on, I’ll offer this visual which sums it all up,
… that’s all for now. Off to the day job…