There are a few things on my mind after a very big week of global central banking.
I remain of the view — which you did not ask for nor sign up for — stated Dec 15,
Employment remains OK-to-good and inflation, while coming in a bit, still requires some work to be done. THIS, again in my view, means lower asset prices (ie stock AND bonds) and at some point … sets up a bullish steepening of yield curves (pick one, I discuss a couple below).
I suppose another way to state the very same is to say, one should be thinking about how to FADE current deep inversion. THINK about it but for the time being, some cheapening in front-end remains, in my view, path of least resistance at the moment.
With that said, a couple charts I’m watching …
DAILY 10yy — bearish momentum BUT TLINE SUPPORT (3.50%)nearby
WEEKLY 10yy — bullish momentum
Choose your time frame THEN pick a narrative and let me know what YOU think … Enough about ME (what do YOU think of ME) and to the reason you are here. I’ve updated THIS PDF, cobbling together some of Global Wall Street’s finest narrative creators … you’ll see some weekly updates and some prior year ahead outlooks. A couple things to note,
CitiFX12 charts of XMAS, “It was the best of times, it was the worst of times” where thinking on YIELDS, “A 5.75%-6.0% level on the 2-year yield and something similar on trhe Fed funds rate looks to be a danger while we anticipate even further inversion in our financial bible, the 2’s5’s curve to at least minus 75 bp’s and possibly further Goldilocksoffered what was Top Of Mind — 2022 - 3 themes in charts where you’ll be NOT shocked to find this one capturing MY attention,
Long history of US 10-year Treasury yields (monthly avg)
(reading very next page you’ll see why RATES matter — think stocks and P/Es
JPMgetting SHORT 5s (and earlier in week Kolanovic reducing equity risk… just sayin)
MSs top 10 surprises for 2023 (NOT one of them was related TO how well IND played rollin’ into VIKES territory, and still lost — what an EPIC game!). I’d pay close attention TO #2 — Fed NOT cutting rates even IN recession — and #3 — Dysfunctional UST market FORCES Fed to pause / END QT — so, umm, pivot hopes remain alive?)
NWM short 10s, IN 5s30s steepeners and long us5y5y infl swaps,
McClellan: Federal Government Not Ready For High Rates
… The most recent data on this, which are as of Q3 2022, show that the effective interest rate on all of the Treasury’s debt is 2.4%. Short term paper like 3-month T-Bills are now higher than that, but the Treasury Department locked in lower rates a couple of years ago when rates were really low. That is helping to keep the total amount of money spent each year on financing the debt at a fairly low level.
But if the Fed is unsuccessful at conquering inflation this time, then it is possible that interest payments on the federal debt will get out of control. Total federal debt is now up to 120% of GDP. And so if the net effective interest rate on all of that debt gets up above 10.4%, then paying the debt service would account for every tax dollar currently coming in.
That makes it very unlikely that we are going to see a federal income tax rate cut anytime soon, even though such a cut might help boost GDP and improve that ratio…
…Bottom Line: The USA cannot afford to see interest rates have a repeat of the big spike in the late 1970s. If rates go above 10% on a sustained basis, it will be Weimar Republic time. Just getting up to 5% would really REALLY bad, and that is nevertheless what the Federal Reserve seems intent on doing.
Ex Fed Clarida blogs “If financial conditions ease because markets price in [2023] cuts, a peak policy rate of 5.25% may not be sufficient to put inflation on a path to return to 2% over time”.--
Hedgopia: Foreign Holdings Of US Stocks And Bonds Positioned For US Recession
… Concurrently, they have also been actively buying up treasury notes and bonds. In October, they purchased $61.9 billion worth, for a 12-month total of $790.1 billion – the second highest total after the record total of $793.3 billion posted in September 2010 (Chart 2).
In fixed income, yields are inversely related to the price. For these foreigners to make money, rates have to be coming under pressure, which is beginning to happen.
The 10-year, which is inverted in the chart, yielded 0.40 percent in March 2020. Rates then gradually persisted high. Since early August this year in particular, the 10-year went up in pretty much a straight line, as the Fed began to aggressively raise rates on the short end. By October 21st, the 10-year ticked 4.33 percent intraday before heading lower.
Longer-term, the 10-year has a long way to go on the downside on the monthly.
Plenty of food for thought … Moving on then TO the week ahead 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 LINKthru TO this calendar,
