sellside observations; 60/40 not dead (yet, again); LUDICROUS speed! the bond market in historical context (1994, 2003); QT = 'X', FRBAtlanta solves for 'X'; and a couple economic calendars ...
Good morning. I hope your day is going better than Sergio Garcia on 5th hole earlier today.
Atlanta Fed GDPNow may very well be named GDPLater as it decreased a touch in its latest iteration (-1.5% from -1.2% HERE), Friday.
UoMICH seems to have moved the needle a bit (back from 100bps hike, stocks BID, etc) BUT as ZH noted there’s a big BUTT surrounding the release … Importantly, note
Stocks Soar On UMich Inflation Guess, But There's A Catch...
… Aggregate variance in respondents answers is its most uncertain since 1980...
Which fits perfectly with Fed Chair Powell's recent admission that The Fed knows nothing about inflation…
Cyclical — EPBMacro — meet Secular (HIMCo’s latest HERE and noted HERE). Eric was good enough to post couple of charts after Friday’s data and this one made me pause as he describes spending after infl, as borderline ‘recessionary’ …
If you crave MORE from EPBMacro (and you should) see his note on DEMOGRAPHICS HERE where you’ll find this tidbit
… Can interest rates go up in any given year or two years? Sure. We've seen that happen a handful of times since 2009, but it just can't be sustained given the demographic gravity.
Still waiting for Eric’s weekly chart of interest to drop …
As far as a few sellside observations from some of Wall Street’s finest, a couple things which caught MY eyes and strike me as important — perhaps of interest to those ‘in the game’, actively managing FI monies relative to benchmarks, a couple (MS, UBS) willing to admit / suggest that 60/40 NOT DEAD. I’d ALSO NOTE,
BMO — long 10s and looking to BUY 3s (vs 2s5s)
One of MSs ‘popular kids’ (Andy Sheets) latest cross asset notes offers ‘short takes on big debates’ and one particularly caught my eyes …
Is the 60/40 portfolio over? No.
There has been lots of focus on potentially lower long-run returns for a 60/40 portfolio. YTD price drop in a 60/40 portfolio has been extreme. We don't think this means a 60/40 allocation is 'over'; rather, those concerns around low returns were well founded, but are also being addressed by the (extreme) recent price drop.
To be more specific, our long-term return estimates (like a lot of people) pointed to historically low returns on 60/40 Equity/Bond portfolios in the US and Europe at the start of 2022. But as prices have declined, those expected returns have gone up. Over the next decade, they suggest a 60/40 portfolio could do better then the recent experience …
Exhibit 7: US 60/40 expected return
Oh, ok … so then bonds MAYBE DO have more fun (or are at least expected to contribute on a going forwards basis! KNEW IT!!
As far as the weekly note with the BEST TITLE — this week I’m givin’ that award to the folks over at Moodys who’s latest,
Market Outlook: Fed May Go Straight to Ludicrous Speed
The note ALSO contains a decent section on DEMOGRAPHICS (EPBMacro quite timely …) and for any who may not catch the LUDICROUS SPEED reference, thank me later
And finally, at least as far as sellside observations go, perhaps it’s really all as simple as Wells frames it this weekend,
…Asset Inflation Is Already Being Curbed
Try to change my mind. I’ll wait…
… AND for any / all (still)interested in trying to plan your trades and trade your plans in / around FUNduhMENTALs, here are a couple economic calendars and LINKS I used when I was closer to and IN ‘the game’.
First, this from the best in the strategy biz is a LINK thru TO this calendar,
Wells FARGOs version, if you prefer …
… and lets NOT forget EconOday links (among the best available and most useful IMO), GLOBALLY HERE and as far as US domestically (only) HERE …
Finally, a couple items from FRBNY and Atlanta.
First up a paper from FRBNY on the recent selloff in the bond markets with comparisons to 1994 and 2003.
… Current Selloff Largest in 40 Years
The chart below plots the selloffs, showing that the current one is the largest in 40 years, exceeding those seen in 1994, 2003, and 2013. As of publication date, the trough of the current selloff occurred on June 14, with a cumulative return of -26.9 percent, versus -14.1 percent in September 2013, -14.6 percent in August 2003, and -18.0 percent in November 1994. None of these episodes compares with the steep losses seen in the two Volcker-era selloffs of 1979-80 (-36.0 percent) and 1980-82 (-38.4 percent).Current Selloff Is Greater than Those Seen in 1994, 2003, and 2013
As Nick Colas / DATATREK concludes after reading the paper,
… Takeaway: in our weekly review of mutual fund and ETF money flows we often call 2022’s persistent bond fund outflows a “fixed income buyers’ strike”. The NY Fed analysis succinctly documents why that is happening. Yes, it is easy to explain why the current bear market is so bad: its starting point in August 2020 was when 10-year yields were 0.5 percent. That does not make the losses any easier to bear, however. No pun intended …
I’d suggest the FRBNY note and visuals worth a look given that saying — those who don’t learn from history are doomed to repeat it?
as I began above talking of Atlanta Fed GDPLater, I thought following ‘working paper’ was worth a look as one tries to price in just how determined the Fed is to break something. Tapering. Tightening. This powerful combination as the Fed blasts the doors open and walks into a room which few have ever been … The Atlanta Fed with an attempt at,
Quantifying "Quantitative Tightening" (QT): How Many Rate Hikes Is QT Equivalent To?
How many interest rate hikes is quantitative tightening (QT) equivalent to? In this paper, I examine this question based on the preferred-habitat model in Vayanos and Vila (2021). I define the equivalence between rate hikes and QT such that they both have the same impact on the 10-year yield. Based on the model calibrated to fit the nominal Treasury data between 1999 and 2022, I show that a passive roll-off of $2.2 trillion over three years is equivalent to an increase of 29 basis points in the current federal funds rate at normal times. However, during a crisis period with risk aversion being doubled, it is equivalent to a 74 basis point increase. I also quantify the effect of QT implemented by active sales. Lastly, based on the model-based estimates, I show that if the Treasury were to issue bills to offset maturing securities, the resulting equivalent rate hikes in the current federal funds rate would decrease dramatically to 7.4 (12.6) basis points during normal (crisis) periods.
Inside THE REPORT you’ll find neat counterfactual visuals like this,
Finally (this time I REALLY mean it), here’s a real time look at most of America discussing inflation with their kids (or the other way ‘round),
… THAT is all for now. Enjoy weekend and lets hope this evening’s NYY v BOS and Sunday Night Baseball works out better than the last weeks / nights and remember, stay outta those ‘pot bunkers’ …