overnight; 60/40 back en vogue; KC Fed SAYS SELL to fight the 'flation; BULLard @ 830a
Good morning…Best I reckon, WWIII has not yet broken out but stock futures are nervous and this continues to spill over in to the bond markets.
Bonds are buying the rumor and at some point one would expect them to be sold (again), after these FACTS are more settled. For now, think 60/40 and CNBC noting stocks fall as Wall St weighs Russia and HIKES
The Fed will be top of mind with 830a comments from BULLard and in the meanwhile, we get things like this from Daly (nv)
CNBC Fed’s Daly advocates for a ‘measured’ approach as rate hike expectations rise
(non voting)Daly good, but voting KC Fed Esther George in today’s WSJ somewhat MORE funtertaining,
Perhaps the pressure on stocks this morning is as much about Fed as it is Russia, then? Perhaps some more BULLard (perhaps some clarification) will sway things one way or another — stay tuned somewhere at 830a for that. AND for some MORE of the news you can use » IGMs Press Picks for today (14 FEB) to help weed thru the noise (some of which can be found over here at Finviz). In the meanwhile,
WHILE YOU SLEPT
The Treasury curve has pivoted flatter off a little changed 3y note overnight as global stock markets fall hard while Fed's Daly and George cautioned against aggressive tightening (see links above). EU stocks have fallen particularly hard this morning (SX5E -3.4%, SX7E -4.6%) amid Ukraine anxieties while German 5yrs have outperformed their Treasury counterparts by ~8bp. DXY is higher (+0.2%) while front WTI futures are modestly lower (-0.4%). Asian stocks were lower, EU and UK share markets are down hard while ES futures are showing -0.8% here at 7am. Our overnight US rates flows saw a 'pretty benign' Asian session while Treasuries rallied ~4bp from earlier lows as stocks in Europe stair-dove lower. Our London desk has seen marginally better selling alongside some TU and TY blocks that trades. In swaps, better paying in the London session too (real$ and vol desks). Overnight Treasury volume was decent at ~150% of average overall with 7yrs (197%) and 20yrs (210%) seeing some relatively active turnover overnight.
Some news and a (‘biblical’)chart,
US News: San Fran Fed's Daly: Being aggressive on rate hikes could be destabilizing RTRS KC Fed's George from an interview Friday: * George : No Need for Fed to Raise Rates Outside of Scheduled Meetings -- WSJ, *FED SHOULD WEIGH ASSET SALES TO CURB INFLATION, GEORGE TELLS DJ . WSJ The funded status of the 100 largest US corporate defined benefit plans rose to 101.4% in January from 99.8% at the end of last year. The last time over-funded was at the start of the GFC Milliman US CEO's: "We see inflation going up everywhere" WSJ Consumer giants warn of rising input costs and push up prices to protect margins FT Investors brace for turbulence in the US corporate bond market FT Investors rush to US oil and gas bonds as energy prices boost finances FT
… The Treasury 2s5s curve also opens the new week sitting atop a support (near ~30.5bp) derived by the March 2020 steeps and the weekly closing range we were in a year ago. As with the 2s10s curve, weekly momentum still aims lower despite the most 'oversold' readings in years. "Too early to fade the flatteners" seems to be the messages for both curves.
And in case you missed, HERE are a couple econ calendars for the week ahead and HERE are this past weekends SELLSIDE OBSERVATIONS. A couple more things which have dropped since and did not make the cut,
Barclays Macro House View Weekly: Front-loading. Central banks have been forced to abandon their "transitory" inflation narratives, and prepare for much earlier monetary tightening
DBs morning REID (on bonds) … We'll review last week at the end but as you'll see 10yr USTs rallied 12bps immediately on the news to 1.91% before closing at 1.937%, having traded at 2.06% when Europe closed for the weekend. We're at 1.956% in Asia, up by +1.9 bps as I type with Brent crude futures +1.25% to $95.62/bbl and WTI futures +1.45% to $94.45/bbl. Equity futures in the US are looking a bit more positive with contracts on the S&P 500 (+0.30%) and Nasdaq (+0.27%) both in the green as nothing has escalated further over the weekend. Meanwhile Asian markets are catching down with the late Friday sell-off with the Nikkei (-2.15%), Kospi (-1.62%), Shanghai Comp (-0.63%) and the Hang Seng (-1.25%) moving lower.
The problem for the bond market is similar to that seen with the Omicron escalation around Thanksgiving. Back then the market was saying how on earth can the Fed think about hiking with a new variant around. This led to a bad set up in fixed income markets as Treasuries rallied to 1.35% against all the inflationary evidence. The obvious trade for many now is also a flight to quality but will a Ukraine conflict solve the inflation problem (e.g. oil and gas problems) and will it prevent central banks from hiking? In addition what if it never escalates any further? So it's fair to say that trading this is not going to be easy. No-one has special insight so a bit of luck on timing and views will be needed. I wouldn't change my structural view of stickier than expected inflation and the urgent need for central bank hikes, especially in the US.
So we wait to see what happens.
Goldilocks notes, Market Sensitivity to Economic Data: Just Getting Started … Some risk assets appear to be “having their cake and eating it too”: discounting a benign economic environment but not the funds rate adjustments needed to arrive there. After all, if some of the flatter yield curve reflects rising growth risks, then equities should embed a larger risk premium—and a lower expected value of earnings. Our equity strategists have lowered their price targets, and our credit strategists continue to forecast rising risk premia. On our part, we continue to believe more tightening in financial conditions will likely be required to generate the slowdown that the economy needs, and we expect increased data sensitivity to catalyze some of that tightening…
MSs Mike Wilson’s weekly warmup, CPI Is Old News; Focus on Growth. With the focus on inflation and the Fed now an obsession, it's time to pivot to growth and now much it will decelerate. We remain more concerned about growth than most and Friday's consumer confidence number should not be overlooked in that regard. Correction remains incomplete.UBSs Donovan asks/answers If oil stays high, what happens? … Higher oil prices raise consumer inflation expectations (oil is a frequent purchase). The effect is to redistribute demand amongst consumers, diverting money from other areas to pay for fuel. That may force some prices to come down as demand weakens further. Ultimately, a sustained oil price increase acts on oil consumers much like a tax increase.
And here are a few MORE things from the inbox and around the www,
Hedgopia: 10-Year T-Yield Seems Ready To Unwind Overbought Condition; This May Not Necessarily Be Panacea For Stocks
BBG: BoJ announces operation to defend its 10-year yield target range
Don’t forget Valentines Day in the workplace, too
… that’s all for now. Off to the day job…