(tech earnings helped USTs maintain BID on 'about avg volumes o/n; TLTs oversold) while WE slept; Rosie makes, "The Case for Bonds"; a(nother) Halloween costume idea
Good morning … Alphabet reports weaker earnings driven by lower ad revenue, says will add headcount at half the pace of previous quarter and Microsoft revenue guidance misses expectations, warns of slowdown in cloud computing spend. Meanwhile, in Central PlanningVille, Australia headline inflation hits 32 year high, with annual core inflation 6.1% versus 5.6% forecast. (there was a time when we thought a stepdown in hikes there was xtremely bullish) and BOJ increases its daily planned bond purchases.
Back here to these shores, Yellen’s throwing an issuance party this week and yesterday we had an,
Ugly, Tailing 2Y "Halloween" Auction Sees Lowest Foreign Demand Of 2022
On tap today is 5yy,
Momentum is now heading from overSOLD towards overBOUGHT and resistance (4.04%) is close. Got5s? AND… here is a snapshot OF USTs as of 705a:
… HERE is what another shop says be behind the price action overnight…
… WHILE YOU SLEPT
Treasuries had their recent gains extended overnight, led by long-end benchmarks, after some weaker than expected earnings from some big Tech names late yesterday. DXY is lower (-0.5%, see attachments) while front WTI futures are modestly higher (+0.5%). Asian stocks were mostly higher, EU and UK share markets are mixed and ES futures are showing -0.6% here at 6:45am. Our overnight US rates flows saw a strong, intermediate-led rally in early Asian hours that only briefly faltered after inflation surprised higher in Australia. By the London cross-over, Tsy prices were back at their highs with our Asia desk seeing good buying from credit-linked names. Treasuries carried their gains into ~4am NY time when UK 10y yields made a bee-line lower (+12bp in 2hrs), clawing back some of the Tsy overnight gains in the process. Overnight Treasury volume was about average overall with 30yrs (159%) seeing the highest relative average turnover overnight…… Equally impressive this week are the longer-term charts of TLT's, the 20+ year Treasury ETF. Here we show the weekly chart of TLT's with its associated momentum. Short-term or daily momentum has already flipped bullishly with a clear signal yesterday (not shown). Meanwhile, weekly momentum now looks at least half-way through a possible turn from a deep 'oversold' condition. So while the set- up for a short-term rally in TLT's looks excellent, this weekly chart hints that reinforcements may not be far behind where a Friday close (after ECI?) could easily flip weekly momentum bullishly in concert to more strongly hint of a sustainable rebound in TLT's.
… and for some MORE of the news you can use » IGMs Press Picks for today (26 Oct) to help weed thru the noise (some of which can be found over here at Finviz).
A couple / few items from the Global Wall St inbox to share. First up from Goldilocks,
Global Market Views: Tightening, but more gradual
1. Extending the US cycle. The fourth and most recent wave of FCI tightening this year has been easily the largest, driving Fed policy pricing to new highs (Exhibit 1). Because we have not decisively met either of the two conditions—convincing inflation relief or a shift towards outright recession—that we think are necessary for a sustained shift, we do not think the pressure for tighter financial conditions is at an end. UK spillovers to global markets have largely come and gone, but the underlying fundamental pressures towards tightening have remained. But we also have been inching towards both conditions: a rebalancing labour market is encouraging even if US inflation is not yet clearly decelerating, and while US growth remains positive and the 10-year yield has just hit a fresh peak, recession and financial stability risks have risen globally. So after a sharp tightening, the threshold for some near-term relief is lower. The Fed also seems keen to step down the pace of tightening after unusually large hikes, given focus on financial risks and lagging elements of inflation, though disappointing inflation news could quickly dash those hopes. If the economy stays out of recession in the next few months, which we think is likely, this would raise the risk of a more gradual but extended Fed cycle into 2023. Additionally, on a relative basis, we think the market is too confident that 2023 will feature both an early Fed pause and a large increase in rates in Europe and the Antipodes
HERE is one from Rosie and whenever HE offers a complimentary invite TO breakfast notes, you pause and read them.
Breakfast with Dave -- Central Bank Forex Intervention Is the “Fund Flow” Constraint on Bonds
… The Case for Bonds
I hear this all the time — about how the Treasury market is experiencing its worst showing this year since 1937 and is to be avoided. But the comparisons to the stock market are way off base. Let me explain the difference between the equity market and the Treasury market. In the latter, you certainly can experience total return losses in real-time as the price of bonds declines, as has been the case now for over two years, but you can always just clip the yield and know full well that these bonds will mature at par. No matter the life of the bond, you know exactly what you are getting paid at the time of maturity. That is the certainty of the situation, as difficult as it is when we go through these yield spasms. Before this cycle, when there was no yield cushion at the 0.5% trough on the 10-year T-note, there was never one time when it lost you money over a five-year interval. This has happened in the stock market no fewer than three times in just the past two decades. Treasuries, always and everywhere, are a ballast and a stabilizer in the portfolio.
Yes, yes, there is inflation risk and duration risk in Treasuries, but they are unique in their payment safety characteristics. They are the only assets where security and certainty of payment are assured and guaranteed. The Treasury strip is the benchmark risk-free asset for funding actuarial liabilities. It is the only investment vehicle with no default risk, no call risk, and hence, no reinvestment risk. It’s the only thing you can buy where you know exactly how much money you will have at a future specified period of time. That is the unique characteristic not shared by any other asset class — not equities, not real estate, not commodities, and certainly not crypto.
The stock market has no such guarantee of payment as Treasuries. Equities are indeed a wealth-builder, but timing is always of the essence. It can take years to get back to breaking even in fundamental bear markets. The S&P 500 peaked in 1929 and didn’t make it back to that level until 1954. Admittedly, that is an extreme example. But we saw a peak in November 1968, and it wasn’t re-attained until March 1972. The S&P 500 peaked in January 1973 and was still at that level in July 1980 (seven years later!). The market peaked in November 1980 and didn’t see that level again until November 1982. The cycle high we saw in March 2000 wasn’t breached until May 2007, and the bubble high in October 2007 wasn’t seen again until March 2013. In fundamental bear markets, it takes an average and median of 4 years to get back to even if you bought at the peak. With Treasuries, you don’t have that worry unless you decide to bail ahead of the time of expiry.
Without crying over the spilled milk in the bond market, the historical record shows that you stand a 92% chance of garnering a positive net return when the 10-year T-note hits the 4% mark, as it recently did…
AND from the CHARTS department, a weekly look from 1stBOS (focused on China)
HERE’S ONE from Bloomberg on rate CUTS still being priced in next year
Despite all the pressure on the US bond market this month, traders have never really backed away from their belief in a Federal Reserve pivot next year. In the face of a wall of pushback from policy makers, Eurodollar bets continue to price in at least one 25 basis point rate cut in 2023. And as my colleague Edward Bolingbroke points out, recent options flow shows a growing conviction the Fed will hike rates by a more modest 50 or even 25 basis points in December, a shift from its recent flurry of supersized moves. US economic data is beginning to look a little more worrying. The latest releases showed home prices falling the most since 2009 and consumer confidence figures missing estimates. That helped trigger a sharp rally in Treasuries on Tuesday. Still, Fed officials will need evidence of a much more significant slowdown before they start to walk back from their aggressive push to get a handle on sky-high inflation.
And here’s another from Bloomberg showing stocks and bonds having rarely been more correlated
This year already looks set to go down in history as one of the worst years on record for investors. A key feature of the turmoil is the way that most asset classes — outside certain commodities, and perhaps the US dollar — have come tumbling down. An unappreciated feature of that dynamic when it comes to bonds and equities is the highly unusual way they are moving ever more tightly together.
This is only the second time this century that the correlation between the Bloomberg global bond index and the S&P 500, both on a total return basis, has exceeded 0.5. The previous occasion was in 2012, also a time of some stresses. But back then the tie between the two peaked as they rebounded, rather than when bonds and stocks were each declining in late 2011. Perhaps that means the ties between the two will soon get even tighter should the growing chorus of dip buyers for both markets prove prescient. The thornier question for investors is which of the two is going to climb from here if the correlation withers away.
Stocks sleeping with bonds. Financial conditions tightening. Watching the USDJPY. Some day we may long for this day just the way in which Marty McFly did … recall, In the original Back to the Future, the action begins on October 26, 1985—that's the date on which Marty McFly travels into the past, and thus the future date he needs to get back to.
With that little said / in mind, here’s another Halloween costume idea via Investing.com …
… THAT is all for now. Off to the day job…