Good morning … as things get back to whatever the new normal IS, I’ll lead with question … sorta. #Got10s? Want ‘em? Asking cuz it doesn’t appear yesterday’s 3yr auction was distraction I had hoped it might be.
ZH: Mediocre, Tailing 3Y Auction Sees Fewest Foreign Buyers Since October
#Got10s?
This chart SCREAMIN’ anything to anyone? Askin for a friend … here is a snapshot OF USTs as of 650a:
… HERE is what this shop says be behind the price action overnight…
… WHILE YOU SLEPT Treasuries are a hair higher while underperforming UK Gilts along with the little-changed Bund market after a stagflationary read-across in the UK labor market data (link above). DXY is higher (+0.2%) while front WTI futures are too (+0.8%). Asian stocks were mixed, EU and UK share markets are mixed while ES futures are showing -0.2% here at 6:25am. We were too early for desk color on flows and overnight Treasury volume was decent at ~110% of average.
… Treasury 10yr yields are indeed idling in place: still bounded above by range support near 4.335% and below by a bear trend/channel in place since early May. Shorter-term momentum studies still guide in favor of higher rates at the moment (lower panel).
THEIR CHART > my chart and so it goes … worth couple grand/mo? Maybe but for now, some MORE of the news you can use » The Morning Hark - 12 Sept 2023 and IGMs Press Picks (who CONTINUES to be sportin’ that new, fresh look) in effort to to help weed thru the noise (some of which can be found over here at Finviz).
From some of the news to some of THE VIEWS you might be able to use… here’s SOME of what Global Wall St is sayin’ …
BLoomberg BNP - US August CPI preview: Progress, but not yet where it counts (precap / victory lap)
KEY MESSAGES
We think a third straight 0.2% m/m core CPI print that lowers the y/y rate to 4.3% (from 4.7%) will help firm up a pause at the coming September FOMC meeting.
While Fed officials will likely look through a gasoline-driven 0.6% m/m rise in headline CPI, higher energy prices could risk amplifying inflation expectations, which generally remain anchored but at the high end of their ranges.
We expect a continued moderation in shelter inflation and another contraction in goods prices to keep core inflation relatively subdued. We anticipate little (if any) improvement in non-housing services inflation, which we see continuing to move sideways on a y/y basis.
We see a 0.3% m/m core CPI print as more likely than 0.1%, given large contractions in several “revenge spending” categories such as airfares over the past couple of months that we think will be hard to repeat in August.
As we have done for most of the past year, last week we released our monthly chartbook which contained an update to our recession probability model (see “Monthly charts: Will the Fed turn the page on terminal as labor tightness lets up?”). This model shows a twelve month probability of recession remaining above 90%. These ominous signs persist in our models despite undeniable evidence that soft landing prospects have improved and that the risk of recession has declined over recent months (see “Recession or soft landing: Is disinflation different this time?”). What is causing this divergence in signals between typically reliable recession indicators and our evolving perceptions of recession risks? We conduct a counterfactual analysis to find out.
We find that extremely elevated recession probabilities are being driven primarily by two variables in our model. If we were to ignore the signal from the inverted yield curve, the twelve month recession probability would be sliced in half to just below 50%. Separately, if we were to ignore the fact that the economy remains far from the Fed's targets, the recession probability would be cut to 80%. Ignoring both of these signals would put the twelve-month recession probability at 30%. Notably, however, this probability remains above the historical unconditional probability of recession from the model.
Does this mean the true risk of a recession is materially lower than implied by our model? While the answer to this question is likely yes, we are also not inclined to completely disregard the signals from typically reliable indicators. When combined with a variety of historically reliable recession indicators that are not in our models, including bank lending conditions and the index of leading economic indicators (LEI) among others, we are left to conclude that recession risks remain elevated.
A month ago, many people were pretty sure serious inflation concerns had passed. After the equivalent of 22 quarterpoint rate hikes and the biggest drop in the M2 money supply since the Great Depression, consumer prices rose only 0.2% in July, with the year-over-year rate of increase down to 3.2%, well below its 8.3% increase in the twelve months ending in August 2022, after Russia invaded Ukraine.
But oil prices have reversed course, and in a few days, the monthly increase in the August CPI will likely show inflation came in hot. If we are right that consumer prices rose 0.6% for the month, then consumer prices are also up about 3.7% versus a year ago, an acceleration …
… We are not back to the 1970s yet, but there are some similarities. Great Society spending pushed government spending on a steep upward trajectory in the 1970s, in spite of the eventual wind-down of the Vietnam War. In turn, policymakers monetized much of this extra spending. The result: a wet blanket of big government which slowed growth, but a boost to inflation from easy money. Reagan and Volcker reversed these two policies and growth accelerated, while inflation fell, after going through a severe recession early in the 1980s.
Does this ring a bell? The government’s response to the Great Recession and Financial Panic of 2008-09 was a big shift upward in spending and the economic recovery that followed was unusually weak. Then policymakers responded to COVID with more of the same, now adding higher inflation to the mix.
It is entirely possible that the drop in the M2 measure of money ends up bringing inflation down to the Fed’s 2.0% target sometime over the next couple of years. But, if so, we don’t expect low inflation to last. There is a growing series of voices calling for the Fed to raise its long-term inflation target from 2.0% to something closer to 3.0%.
In the short run, we expect the Fed to stick to a 2.0% inflation goal. Changing the target at this juncture risks severely undermining the Fed’s credibility. This happened in the 1970s…even if not explicitly stated, the Fed shifted their thinking on inflation and said it was too hard to stop.
Inflation averaged 1.8% in the ten years pre-COVID. Don’t expect inflation to average that low in the decade ahead. Not until the US finds a way to repeat the 1980s policy mix.
We expect a 0.24% increase in August core CPI (vs. 0.2% consensus), corresponding to a year-over-year rate of 4.30% (vs. 4.3% consensus). We expect a 0.63% increase in August headline CPI (vs. 0.6% consensus), which corresponds to a year-over-year rate of 3.58% (vs. 3.6% consensus).
We highlight three key component-level trends we expect to see in this month’s report. First, we expect a 3.1% decline in used car prices and a 0.2% decline in new car prices in August, reflecting lower used-car auction prices and continued increases in auto dealer promotional incentives. Second, we expect residual seasonality and higher airfares (+6%) to result in a 4.3% increase in public transportation prices this month. Third, we expect shelter inflation to remain roughly at its current pace (we forecast rent to increase by 0.40% and OER to increase by 0.48%), as the gap between rents for new and continuing leases continues to close.
Going forward, we expect monthly core CPI inflation to remain in the 0.2-0.3% range in the next few months. We expect continued moderation in shelter inflation and lower used car prices to be offset by a swing in the CPI’s health insurance component when the BLS incorporates new data and a methodological change in October. We forecast year-over-year core CPI inflation of 3.8% in December 2023 and 3.0% in December 2024.
Goldilocks - Global Markets Analyst: DM Debt - How to Move Mountains (reads as bad as it sounds)
With public debt-to-GDP levels in developed markets at multi-decade highs, the recent rise in inflation and policy rates is refocusing attention on debt dynamics as interest costs increase and fiscal policy adjusts following the pandemic.
Using a debt accounting exercise, we show that periods of sustained debt reduction are typically driven by strong primary balances and above-average growth. Following 1980, inflation has played little role in debt reductions.
Current fiscal projections and current market interest rates on average do not point to declines in debt-to-GDP ratios across DMs. We estimate that market implied r - g, the difference between real interest rates and growth rates, is now positive for many countries.
Japan provides an example of high debt peaceably coexisting with low interest rates. However, given current high inflation, wider deficits, and rising interest costs, we think it unlikely that we return to the era of structurally low interest rates in the US, UK or Europe. As a result, we see the risks to term premia skewed higher as fiscal risks simmer …
WisdomTree - Prof. Siegel: Data Shows Resilience in the Economy (higher for longer … hmm … an interesting path TO stocks for the longer run…)
… Strong economic data are keeping the 10-year bond yields elevated. We almost broached the 2% level on the 10-year TIPS before it settled closer to 1.9% and the 10-year nominal bonds were around 4.25% on Friday after being closer to 4.35%. Bond yields remain elevated for a number of reasons. The inflationary surge and fears of future inflation have left bonds as less of a perfect hedge asset to risky assets like stocks. That ability for bonds to act as a form of hedge and insurance-like asset caused yields to get to super low levels before the recent inflation. A rising correlation structure between stocks and bonds makes investors demand more compensation and higher yields to hold bonds.
But I believe the higher rates are likely to be with us for some time, although I do not think the Fed should raise interest rates any further from here. It is highly unlikely for the Fed to increase rates in September, and while the markets have priced in some probability of a November hike, I don’t think the Fed needs to make that move. We get the CPI and the PPI reports this week. The data will not be as comforting as some of the prior reports. The CPI expectation for headline inflation is 0.6% for the month and much of that gain is from the rise in oil and energy prices. Core inflation will look better and the year-over-year rate will continue to drop…
… For equities, I still see an upward tilt for the remainder of the year. There was softness in the largest stocks like Apple last week on headlines that China was going to prevent more of their state workers from using iPhones. I think this was an over-reaction—most of the state workers already were not using these phones—so the headline is not that impactful. While China would like to encourage more domestic rivals, if the Apple iPhone remains an attractive product to consumers, there will still be a large group that favors Apple’s brand. Yet these types of headlines are likely to keep re-appearing as we navigate through complex geopolitical dynamics ahead.
Tech stocks seem to go up whenever the bond yield stops doing so. Leading tech stocks higher today was Tesla, which is actually in the S&P 500 Consumer Discretionary sector. Morgan Stanley issued a very bullish report on the auto company's new "Dojo" supercomputer. It suggests that Tesla may also be a play on AI.
Meanwhile, the 10-year Treasury bond yield remained below 4.30% following a report that consumers' inflation expectations remain subdued, while more of them are worrying about the availability of credit. On the other hand, the Fed reported on Friday that household net worth rose to a record high. Consider the following:
(1) Inflation expectations. August's survey of consumers conducted by the NY Fed found that expectations for inflation one-year ahead rose just 0.1 percentage point m/m to 3.6% (chart). The three-year expected inflation rate edged down 0.1 point to 2.8%.
(2) Credit availability. The percentage of survey respondents saying it is harder to get loans, credit cards, and mortgages than a year ago rose to nearly 60%, the highest level in a data series that goes back to June 2013. That's not surprising since the Fed's Senior Loan Officers Opinion Survey has been showing that lending standards have tightened significantly this year. In addition, the growth rates of bank loans to consumers have been falling (chart).
Why isn't this bearish for stocks? The Fed would certainly welcome slowing consumer demand and might conclude that further rate hikes may not be necessary…
… Expectations for the balance of 2023 now stand in stark contrast to the prevailing school of thought to begin the year, which called for recession and a Fed pivot to lower rates by year end. The FOMC (Federal Open Market Committee) is likely to increase their 2023 median GDP estimate with the release of economic projections at the next meeting slated for September 19–20. The last FOMC Summary of Economic Projections, released in conjunction with the June 13–14 meeting, pegged 2023 median real GDP growth at 1% which, three months removed, is now well below consensus expectations. The FOMC could more than double that estimate at the upcoming September meeting after a summer string of better than expected economic data. Consumer spending was vigorous in June, July, and August. All eyes are focused on the “Barbenheimer” effect — the estimated 0.6% boost to consumer spending in July and August from movie, concert, and related summer expenditures. The U.S. labor market remains robust even after an unexpected uptick in the unemployment rate with both initial jobless claims and continuing claims coming in lower-than-expected last week. Factory orders and residential investment have also all surprised to the upside in recent weeks alongside the strong ISM (Institute of Supply Management) Services print last week that drove U.S. Treasury markets into the red for the year. While the Atlanta Fed GDPNow model is notoriously volatile and likely overstates Q3 GDP at 5.6% anything better than 3.2% would represent the strongest quarter of growth since the COVID recovery in 2021. The lagged impact of restrictive monetary policy, including short-term rates north of 5% and tightening lending standards, have likely yet to take their full toll and the yield curve inversion is suggesting the Federal Reserve will likely push the economy into recession at some point. That said, in the near term, unexpectedly strong economic growth likely biases long-term rates to the upside heading into the end of the year…
… Bond yields at their highest levels in over a decade certainly warrant a growing comfort with duration. That said, a short to intermediate stance could be warranted for the foreseeable future. It might be some time before investors should search for yield on the long end. The inverted curve creates a silver lining with the highest yields in the market in the short-to-intermediate maturities. With little to no term premium for investing in longer-dated bonds, investors are likely not compensated for the duration much less the risk that long-term rates continue to move higher.
ZH: NY Fed Survey Finds Sharp Deterioration In Household Financial Sentiment As Long-Term Inflation Seen Rising To 15 Month High (moreon FRBNY noted by Dr. ED just above … )
AND in conclusion, having absolutely NO global MACRO or micro implications for USTs (at least not that I’m currently aware of), but something from Armstrong which struck ME as quite funny, or not …
Armstrong: Senior Citizen of the Silent Generation Seeks 20th Term
I'm a bit behind, buying a car is very time consuming! Anyways, 10 yr breaching 4.30 this morning INTERESTING! I can't thank you enough for who you are BondBeat Man, I can't thank DDB enough for her substack's suggested link to you. Be Well!
I'm a bit behind, buying a car is very time consuming! Anyways, 10 yr breaching 4.30 this morning INTERESTING! I can't thank you enough for who you are BondBeat Man, I can't thank DDB enough for her substack's suggested link to you. Be Well!