overnight UST recap(s) and a "weekly warm-up" (on stocks)
Good morning. With a few things to watch on EVERYONES mind, BBG DETAILS their FIVE THINGS
Cases surge: 10mm people positive
Halt: more property stocks impacted by Evergrande
Deliveries: Tesla delivered 308k cars (much more than exp)
Markets rise: obvious
Coming up: Markit PMI 945a, Construction Spending 10a
First, from the firm which tells us what (little) we missed due to holidays in Asia,
WHILE YOU SLEPT
Treasury cash and futures markets are opening 2022 lower as EU and US stocks have opened their new year on a front foot. DXY is modestly higher (+0.1%) while front WTI futures are too (+0.75%). Those Asian equity markets that were open were generally higher, EU share markets are roughly 1% higher while ES futures are showing +0.65% here at 7am. There were no overnight Treasury flows available as Asian and London trading was shut and, because of that, our volume sheet is not working this morning.
They continued on with some musings, where I was surprised to find something not bearish of the longer-end,
…As we walked out the door on Friday we noticed that UST 30yr bonds appeared well-poised for a new tactical Buy signal after their saw-toothed sell-off from the December 3rd high (1.665%). Friday's late-day sell-off left bonds still 'oversold' but with no clear tactical trend signal (chart 1) yet. Even so, this chart, and the two that follow, do hint that key long-end benchmarks are beginning the new year looking locally un-loved and, thus, well-poised for corrective bull moves under the right conditions.
And here it was I thought The Street operated with the idea in mind that if you HAD something nice to say about bonds, well, then just don’t say anything at all! Mom would be so frustrated?
Moving on to a few words of the week ahead, from the firm constantly voted atop the II popularity contest,
… The week ahead offers very little that will undermine efforts to bring forward tightening expectations in the runup to the December payrolls report. Risk assets are performing well overnight with equity futures consistent with Q1 being characterized by renewed optimism for both the real economy and financial markets. We’re onboard with the New Years optimism; at least to the extent omicron remains an inflationary impulse versus a drag on growth.
Suffice it to say, today’s calendar (limited to construction spending) won’t offer much insight from a fundamental perspective. However, the sentiment associated with the spike in covid cases will be evident and, we suspect, ultimately define the tone for US rates trading as the week gets underway. With an emphasis on the front-end (2s, 3s, and 5s) underperforming, we’re content with sticking to the proverbial gameplan of a bearish lean as 2022 commences.
Tactically speaking, this shop ALSO notes TECHNICALS might garner some attention,
…The technicals may play a greater role in dictating the immediate price action – a notion that also resonates with the quickly approaching December jobs report. Along with the pullback from the latest foray below 1.40%, momentum in 10-year yields has continued to trend bearishly although with stochastics nearing oversold, a further selloff will face the headwind of oversold conditions. Support takes the form of last week’s yield high at 1.558% before an unfilled opening gap that was created during the omicron rally from 1.598% to 1.634%, coming in through there. On the other hand, a new year’s bid would need to overcome the 100-day moving average of 1.454% and then there is the local yield low that is also a volume bulge at 1.33%.
Specifically on 10yy — a few words and a couple visuals,
… The new local yield low in 10s also coincides with a volume bulge around 1.33%; a zone that is marked by the low yield print at 1.258%. After moving mid range and shuffling sideways, momentum is bullish and pointing to a challenge of the low 1.30s. Support is the 200-day moving average at 1.473% with 1.50% clearly significant through there. An opening gap is unfilled from 1.598% to 1.634% which will be support beyond 1.50%. The now thrice-probed range top at 1.70% has demonstrated its relevance, and then two clear hurdles on the way to 2% are 1.753% and 1.774%. In 2s/10s, support is 75 bp following the latest round of flattening. Meanwhile, resistance will now be former support at 93 bp and then there is 100 bp for round numbers’ sake, before the local steep of 114 bp would need to be overcome.
… And finally, a page from one of Wall Street’s favorites stock - jockey’s,
Weekly Warm-up: Turn the Page but Not the Narrative
A new year brings new investment opportunities even if the narrative isn't changing. We still recommend a large cap defensive bias given tightening financial conditions and decelerating growth. Round it out with a barbell of small/mid cap value until valuations fully reset this Spring.
A new year but same narrative, for now. Tightening monetary policy and decelerating growth supports our large cap defensive quality bias, a strategy that we believe has worked well since we published our 2022 outlook in mid November. For those looking to add some more spice to their diet, we suggest small/mid cap value over growth until the mid cycle transition de-rating process is complete in 1H 2022.
Continue to lean defensive amid peaking PMIs. Leading indicators point to falling PMIs in coming months. Our work in recent weeks shows this dynamic should be supportive of defensives outperformance over cyclicals amid large cap quality leadership. This week, we expand our analysis to the industry level and illustrate that within defensives, Health Care, REITs and Consumer Staples tend to be the top performers in a falling but still elevated (i.e. >50) PMI regime.
Tighter Fed policy is also supportive of defensive outperformance. In addition to peaking PMIs, early 2022 is also likely to bring a mid cycle Fed tightening regime. As we have written about in recent weeks, while tapering may not be tightening for the economy, we believe it to be for the equity market. In this week's note, we look at industry group relative performance in the first year of prior Fed tightening cycles. Interestingly, we find some similarities in terms of leadership to the PMI analysis. Namely, Real Estate, Healthcare and Consumer Staples dominate the leaderboard. On that score, we're overweight Real Estate and Healthcare, and continue to recommend Staples over Discretionary.
Opening the report, you’ll find this from p1 (and more than likely on ZH soon if not sooner),
… The good news is that while we missed on our target for the S&P 500, we traded most of the key rotations well. This helped our Fresh Money Buy List to outperform the S&P 500 by 300bps. Much of our outperformance came in the firsthalf of the year by capturing the high beta cyclical move in 1Q2021 before pivoting to a large cap quality preference. This recommendation change was made under the assumption we were entering the typical mid cycle transition. This worked well with large cap quality having a very strong run relative to small caps (Exhibit 1).
After a short reversal in this pair trade during the fall, we reiterated our preference for large cap quality over small caps in our year ahead outlook in mid November. This was before Omicron hit the scene and was based on our view that the traditional mid cycle slowdown had further to run,especially in the US where fiscal and monetary stimulus were both about to fade. This is also why we have had a large cap defensive quality preference since our outlook was published.Fast forward to today and that seems to be what's happening (Exhibit 2). In today's note, we will further address why we think this defensive pivot should continue to work with a few nuances…
He continues with an entire section (and couple visuals) dedicated TO the Fed and PE,
… We Continue to Prefer Defensives Amid Peaking PMIs and Fed Tightening
…In addition to peaking PMIs,early2022isalso likely to bring a mid cycle Fed tightening regime. As we have written about in recent weeks, while tapering may not be tightening for the economy, we believe it to before the equity market…
More at some point (today, this week) but for now, with kids supposed to go back to school just now being delayed by same storm postponing Biden’s presser in DC, we here in central NJ will continue circling the wagons and I wish YOU a great start to the day/week/month and year… !