(USTs are "a hair" higher/flatter on below avg volumes) while WE slept; "Dealing with the ceiling"
Good morning … unless, of course you BOT long bonds at triangulated support,
WHY?
BMO: Retail Sales Mixed -- Supportive for Q2 real GDP estimates
Wells Fargo: Control Group Retail Sales Posts Solid April Gain
ZH: Biden & Bad Data: Big-Tech Bid, Banks Skid; Bonds & Bullion BreakdownMixed macro and debt ceiling drama dominated the day...
Overnight saw shockingly ugly data in China (good news - more stimmys?)
US Consumer bad - Home Depot earnings and outlook cut (blamed on weather and lumber)
US Consumer good - core (nominal) retail sales better than expected (headline weak and YoY very weak)
US Industrial production strong-ish (despite manufacturing surveys being a disaster)
However, put it all together and global macro surprises indices are tumbling...
And so I’ll leave my triangulating TLINES etched in for now but rest assured I’m sharpening up my crayons so they are at the ready and will redraw / move the goalposts soon but thought for now, I’d simply redirect your attention TO the 10yy
…NOTE: momentum on verge of an uncompellingly oversold and BULLISH cross (Mom always said if you don’t have anything ‘nice’ to say…and for a more comprehensive, intelligent look, continue to scroll down / read for some thoughts / visuals hot off the Swiss Alps…)
For NOW, though a look at 20yy ahead of this afternoon’s liquidity event (aka AUCTION)
AND … ‘bout that aformentioned bond BID or triangulation, again? Well … said another way,
OR perhaps it is not … So one COULD maybe say as much for the PIVOT ‘istas? Just don’t tell those positioned for it (for more on THAT see the one, the only, the BAML fund manager survey — noted below) and in the meanwhile … here is a snapshot OF USTs as of 706a:
… HERE is what this shop says be behind the price action overnight…
… WHILE YOU SLEPT
Treasuries are a hair higher and the curve is a hair flatter this morning after solid auction results in France, Germany and the UK this morning (ITC). DXY is higher (+0.35%, see attachments) while front WTI futures are higher too (+0.6%). Asian stocks were mixed, EU and UK share markets are little changed while ES futures are showing +0.25% here at 6:45am. Our overnight US rates flows were unavailable with overnight Treasury volume showing ~85% of average.
… and for some MORE of the news you can use » IGMs Press Picks for today (17 MAY) 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 what Global Wall St is sayin’ …
I’ll start with what is by now, one of the most widely talked about sellside notes
BAMLs Global Fund Manager Survey: Wall Street’s Best Friend
Our survey says: investors bearish, Fed done, risk assets resilient so long as the landing is soft; FMS cash levels high 5.6%, allocation to bonds @ 14-year high, to commodities @ 3-year low, BofA Bull & Bear Indicator 3.4…positioning still contrarian +ve for Wall St.
From one of the popular notes to another fan fav, JPMs Marko Ks latest,
JPM: The J.P. Morgan View
Bonds imply recession while stocks price soft landing… Bonds imply recession while stocks price soft landing: We stay UW Equities given: a) they price in a soft landing, while hiking cycles that are accompanied by tighter lending standards always end in recessions; b) equities appear disconnected from bond markets, soft data and monetary/liquidity signals; and c) debt ceiling risks, with a sell-off likely if the debt ceiling issue goes down to the wire…
… Overall, we continue to see long-term leading economic signals pointing to bad times while the market makes rosier assumptions. We are inclined to view signals like yield curve inversion and higher SLOOS lending standards as legitimate and the bullish market signals as undependable. A rally built off a handful of stocks can easily reverse. While there may be substance in the ChatGPT euphoria, the question is where it is enough to be the basis of a rally for the broader market. As it stands now, the difference between the capweighted ytd return and the equal-weighted highlights this extreme distortion. Ideally in a rally, one would like to see growing participation, and cyclical signals confirming, e.g. small cap vs large, copper vs gold, etc. And instead, we have the exact opposite: the narrowest rally with cyclical signals going the wrong way. As discussed, the nature of the stock rally assumes soft landing, in other words, the falling rates assumed by the market will restore us to a goldilocks. But the history of hiking cycles does not offer much hope on this, as only two of the hiking cycles in our working lifetimes produced a soft landing with some decent runway ahead of recession: mid-to-late 1980s and 1994. Meanwhile, until now we have not had claims numbers heading into the ‘danger zone’ above 250k, so despite a decent jobs number, the cracks are emerging.
… Bonds imply a recession but market states have been fluid this year and the dataflow is still mixed. We refrain from adding risk here and stay modestly OW Bonds and OW Cash….
On that soft landing idea, not everyone is ‘on board’.
DBs Early Morning REID:
… Would it be obvious in hindsight as to what happened next? For us, this has been the most predictable US cycle of our careers from the moment the US money supply exploded. From then it wasn’t difficult to predict we’d get very high inflation, and from then that central banks would have to hike rates aggressively. The next stage continues to look clear to us: given aggressive rate hikes and curve inversions, we think there’ll be a US recession rather than a soft landing. Indeed, just about every leading indicator is now pointing to one. Does it look as obvious to you?
Back TO JPMs Marko K and being ‘modestly OW bonds’ TO,
ZH: The Bond Market Is About To Get Intimidating Again
Authored by Simon White, Bloomberg macro strategist,As the bond rally runs out of steam, the case for shorting Treasuries is becoming increasingly compelling.
The bond market that US political advisor James Carville wanted to be reincarnated as is about to get intimidating again.
The rally off last October’s lows is fading, and there are now a litany of reasons why longer-term Treasuries are likely to soon fall in price, taking yields higher and supporting the yield curve:
Global financial conditions are easing
Excess liquidity is rising
Inflation is becoming entrenched
An increasingly precarious fiscal situation
Declining overseas demand for USTs
An expected jump in issuance when the debt-ceiling is resolved
First of all, let’s get the debt-ceiling elephant out of the way.
In the two previous debt-ceiling episodes in 2011 and 2013, bond yields mostly fell. Perversely, in a risk-off environment Treasuries were the only safe-haven asset, even if they were at the center of why risk was elevated in the first place.
We may get the same knee-jerk reaction this time, but that’s just a selling opportunity. Net Treasury issuance has slowed to a crawl ahead of the debt-ceiling “X Day”. But if it is resolved (as is still more likely than not), issuance would be ramped up rapidly, with the surfeit of supply weighing on prices.
But even without the debt-ceiling tension, we are at a turning point in the cycle. Short-term rates are peaking, not just in the US, but around the world. This is captured in the Global Financial Tightness Indicator (GFTI), a diffusion of G20 central-bank rate hikes. It has been rising, and this upturn should gather pace as central banks increasingly focus less on inflation and more on growth (despite what they may currently say – remember, talk is cheap).
As the chart below shows, rises in the GFTI precede rises in the US 10-year yield.
This might seem counter-intuitive: short-term rates peaking should mean lower longer-term yields. But what the relationship is saying is that once global rates have peaked, this allows the market to price in a future cyclical upturn for the US economy, which longer-term yields capture by moving higher today.
We can see the same sign of a yield upturn in excess liquidity.
Excess liquidity is the difference between real money growth and economic growth, and is beginning to turn up. Such environments tend to favor stocks over bonds as investors prefer riskier assets, so as to fully capitalize on buoyant liquidity conditions.
This cycle could see this preference turbo-charged due to persistent and elevated inflation. Equities are generally taken to be good inflation hedges, while bonds are not. This is actually not true: neither broad equities nor bonds make good inflation hedges.
Nonetheless, the perception will be enough to keep equities supported relative to bonds, at least in the first instance. This may already be happening, given equities have remained relatively supported and bonds’ rally has been lackluster despite increasingly recessionary signs. The specter of inflation is a reminder that this will not be a garden-variety downturn.
Indeed, bonds have yet to price in the embedded, above-target, and prone-to-flaring-higher inflation that’s likely to become apparent once the current disinflationary trend is over.
Term premium has remained remarkably becalmed in this cycle, but it is unlikely to stay that way. Heightened inflation expectations are the canary in the coal mine warning that bond holders may soon demand extra yield to lend money.
The debt ceiling has brought scrutiny to the US’s fiscal situation. It’ll likely be resolved by extending the debt limit, but that will not detract from the fact the US (like several other DM countries) is heavily, and increasingly, reliant on borrowing.
The US’s budget deficit is currently running at 8% of GDP, wider than any other major country, and already significantly more than where it was prior to previous recessions.
Safe haven or not, lenders to the US are becoming more alert to the deteriorating US fiscal outlook, making them warier of holding as many USTs. Foreign reserve holders have begun to diversify their holdings, while elevated short-term rates have raised FX hedging costs and kept buyers like Japan away.
Those waiting for a large short-covering-driven rise in USTs may be disappointed. Commitment of Traders positioning is very net short, but on a standardized basis it is much less extreme. A more holistic measure based on the inferred positioning of macro funds and CTAs, as well as JP Morgan’s Client Survey, is short, but not at levels that would suggest a brutal short-covering rally is on the way.
The halting rally after Wednesday’s softish inflation report is a sign momentum is shifting the other way. The bond market may once again be about do what James Carville envied it for: intimidate everyone
Really hard to follow up the image of Carville quote wishing he was the bond market,
"I used to think that if there was reincarnation, I wanted to come back as the president or the pope or as a . 400 baseball hitter. But now I would like to come back as the bond market. You can intimidate everybody."
And so from that TO a couple / few (WEEKLY UPDATED) visuals from THE Swiss family UCSFB or whatever they’ll be calles,
CSFBs Multi Asset Macro Pack: Key Technical Themes for the next 1-3 months
Our Credit Suisse Global Risk Appetite Index is starting to turn lower on the back of a weekly MACD momentum divergence, which supports our view to “Sell in May” ahead of a potential “risk-off” phase. From a technical perspective, this turn lower in our Risk Appetite Index reinforces our core bias for a fall in both Equities and Global Bond Yields going forwards.
Please note though, the Credit Suisse House View has shifted to an overall neutral stance on Global Equities.
The S&P 500 remains trapped in a very tight range above its 63-day average at 4053/48, with a break below here needed to confirm a rejection of key resistance at 4195 and a renewed fall.
… Elsewhere, we maintain our bias for falling Global Bond Yields, with the 10yr US Bond Yield staying on course for a fall to 3.00%, with trend following indicators showing further signs of turning over the past couple of weeks
AND … finally, I’m going to leave you with one last note / link and thought as we’re all,
Nordea Macro & Markets: Dealing with the ceiling
… Markets in the firing line. The trouble is that the financial market is in the middle of the hot mess and one could argue that market reactions may even be necessary to force Congress to act. So far, it is hard to make the case that any broader asset classes reflect debt ceiling risks. The US Treasury curve clearly reflects the risks and possibilities of different X-dates, but other asset classes, and for example implied equity volatility, do not appear to reflect the X-dates.
In 2011, a deal was struck that lowered spending (so the threat worked) just a few days before the X-date. The 2011 episode was a very close call and also resulted in a downgrade of US debt by Standard & Poor’s. Today risks are that failure to strike a deal and risks of an early X-date could cause a similar situation of high volatility and risk-off in markets.
Chart 3: Market impact of 2011 debt ceiling impasse
Using the 2011 episode as a playbook, it seems likely that failure to reach a deal well in advance of the X-date will cause a similar market reaction of rising prices of bonds and gold and falling stock prices. The cross asset market actions year-to-date actually completely mirror the market moves ahead of the debt ceiling in 2011: gold outperformed stocks; stocks outperformed bonds; and bonds outperformed the US dollar. If the debt ceiling risks indeed intensify, this pattern will break and should see prices of stocks fall and prices of gold and bond rise. The US dollar went sideways during the 2011 episode as a consequence of the sovereign risk from the debt ceiling being matched by sovereign risk from the European debt crisis during this period. However, today the US dollar is likely to decline if similar stress around the debt ceiling risks materialises.
Past performance is NOT an indicator of … oh, never mind … THAT is all for now. Off to the day job …