(USTs are lower / flatter on 'normal' volumes ahead of CPI)while WE slept; "Three Sequential Signals of Recession ... The Most Dangerous 8-Month Period" -EPB (please read, great stuff)
thebondbeat.substack.com
(USTs are lower / flatter on 'normal' volumes ahead of CPI)while WE slept; "Three Sequential Signals of Recession ... The Most Dangerous 8-Month Period" -EPB (please read, great stuff)
(USTs are lower / flatter on 'normal' volumes ahead of CPI)while WE slept; "Three Sequential Signals of Recession ... The Most Dangerous 8-Month Period" -EPB (please read, great stuff)
That in mind and ahead of today’s CPI then 10yr auction, a visual where yields huggin’ an old, dear friend and TREND line tells me what I need to know,
… here is a snapshot OF USTs as of 719a:
… HEREis what this shop says be behind the price action overnight…
… WHILE YOU SLEPT Treasuries are lower and the curve flatter ahead of CPI, a 10-year auction and the FOMC Minutes that follow. DXY is lower (-0.15%) while front WTI futures are UNCHD (see attachment). Asian stocks were mixed, EU and UK share markets are all modestly higher while ES futures are showing +0.15% here at 6:55am. Our overnight US rates flows saw a low energy Asian session with some real$ and fast$ selling seen in the belly. The front-end under-performed but we didn't see that selling. Once London opened, the desk there saw a more active session with the dominant flow being selling in 2's-3's from real$ and HF's alongside solid buying in the relatively cheap, X-date T-Bills at the 3mo to 4mo point. Interestingly, the desk added that liquidity and volumes have returned to a more normal state amid the recent ranges. Overnight Treasury volume was ~110% of average overall with 10's (173%) and 2's (155%) seeing the highest relative average turnover this morning.
… Next up we look at two sub-indexes updated from NFIB yesterday (small businesses have accounted for two of every three jobs added to the economy over the past 25 years SBA). The first shows yesterday's 2.0 reading in the 'Good time to expand' sub-index- matching the March 2009 low and just a tick above the June 1980 low (1.0). Both the March 2009 and June 1980 low prints occurred during official NBER recessions. Hmmm.
The next attachment shows NFIB's 'Availability of loans' sub-index where the latest plunge to -9.0 looks similar to the flight path lower taken in the middle of 2008. Again, hmmmm.
… and for some MORE of the news you can use » IGMs Press Picks for today (12 APR) to help weed thru the noise (some of which can be found over here at Finviz).
I’d be remiss if I didn’t mention a couple from ZH where yesterday we learned yesterday, via the IMF
… But what we found most notable in the context of the credit crunch is how difficult it was for small US businesses to obtain a loan in March after multiple bank failures led to a further tightening of credit conditions. According to the NFIB, a net 9% of owners who borrowed frequently said financing was harder to get compared to three months earlier, the most since December 2012. Worse, the 4 point monthly drop in the series was the biggest collapse in credit availability in more than 20 years.
The same share expects tougher credit conditions in the next three months, matching the highest level in a decade and confirming that the credit crisis is only just starting, at least when small businesses are asked how they perceive coming supply or the lack thereof.
AND there’s more … BUT I’ll move on.
From some of the news to some of THE VIEWS you might be able to use… here’s what Global Wall St is sayin’ … before CPI
US consumer price inflation is expected to slow (month-over-month). Uncertainty comes from volatile used car prices (which do not affect most US households) and the fictitious Owners’ Equivalent Rent (which affects no US households at all). Housing costs will be disinflationary this year, but the timing is difficult.
The 2021 transitory inflation driven by demand is now deflation—television prices are more than 21% below their post-pandemic high. The second inflation wave—an energy supply shock—is now disinflationary. Profit margin-led inflation remains. As companies sneak profit alongside cost increases, profit margin-led inflation is likely to be stronger at the very start of the year when cost increases are most frequently passed on.
New IMF growth forecasts reflect the impact of banking system volatility. US Treasury Secretary Yellen and Federal Reserve officials have downplayed fears of an accelerated tightening in lending. Such officials need to cheerlead the banking sector at times like these, so there may be a rustle of pom-poms in their assertions.
Fed minutes are due—the Fed met at a time of greater uncertainty over the banking system, but the final draft of the minutes was written two weeks later when things had calmed. Bank of England Governor Bailey will speak on price and financial stability.
Watching / waiting for CPI, 10yr auction as well as Fed minutes and here is what is on Ed BOND VIGILANTE Yardeni’s mind
The March CPI report is likely to show that inflation remains high in the US, but is continuing to moderate. In February, the headline and core CPI inflation rates were 6.0% and 5.5% on a y/y basis. Stock and bond prices should rally if the March numbers are lower by around 50bps. They would probably sink if the results are around 50bps higher. We are expecting the headline CPI inflation rate to fall to 3.5%-4.5% and the PCED headline inflation rate to fall to 3%-4% by the end of this year without an economy-wide recession
CPI goods inflation peaked last summer around 14.0%. It was down to 3.5% in February (chart). In other words, it has been transitory. CPI services inflation has been persistent rising to 7.6% during February.
Rent inflation has been a major contributor to the surge in services inflation. CPI tenant rent rose 8.8% during February. It should moderate in coming months according to market-based measures of current rent inflation (chart).
It's interesting to note that the CPI inflation rates in China and the US tracked each other quite closely prior to the pandemic (chart)…
From China TO France — well, not really BUT following note comes from former Blomberg economics team NOW hanging shingle outside large French operation,
US: May hike or mayday?—Q1 SLOOS will determine Yelena Shulyatyeva , Andrew Husby, Carl Riccadonna, Andrew Schneider
KEY MESSAGES
Recent tightening in financial conditions is expected to translate to stricter loan standards in the Senior Loan Officer Opinion Survey (SLOOS) due on 8 May. The survey will likely colour the FOMC’s 3 May rate decision. Should the results indicate a significant deterioration in credit availability, the committee could opt to hold rates steady (instead of our baseline forecast for a 25bp hike and pause thereafter). The Q4 2022 SLOOS already pointed to significant tightening in lending conditions, predating the recent banking turmoil.
Below we take a look at bank lending standards before the latest tumult in the banking industry, and explore where the initial ripples may emerge in the economic data.
We argue households will find themselves in a vulnerable position if the Fed succeeds in generating a softer job market as we expect. The tightening of US financial conditions - and likely further tightening in lending standards and reduction in credit provision – will probably put upward pressure on labor income and the growth outlook (see US: Hike in May, then go away, dated 30 March).
On the business side, softening financial sector profit growth could limit credit extension ahead. The upcoming corporate earnings period will shed light on any likely corporate belt tightening ahead of the release of the next SLOOS.
… And as seen below, market-implied inflation expectations, or what the bond market thinks inflation will average over time, have remained, more or less, in a normal range for the last six months and are seemingly well anchored. After spiking earlier last year, market-implied inflation expectations have fallen back to levels seen earlier in the last decade. Moreover, markets expect inflation to average 2.2% over the five year period, beginning five years from now (2028-2032), which is the Fed’s preferred way to measure long-term market-implied inflation expectations. So despite surprise production cuts from OPEC+ and bank stresses that many thought would prompt the Fed to abandon its inflation fight, markets continue to think the Fed will get inflation back to its 2% target.
And while we get additional CPI data on Wednesday that will likely show positive (albeit slow) progress, the bond market continues to believe the Fed will win its fight against inflation… one way or another. Markets are generally expecting one more rate hike in May but then rate cuts later this year. Expected rate cuts, still calm credit markets, and market-implied expectations drifting to 2% all suggest the Fed can win the fight. Can markets be wrong? Of course. And if investors think markets are too sanguine on the inflation fight, we would suggest a small allocation to TIPS strategies as a hedge.
On THAT — allocation to TIPS strategies as a HEDGE — note, enter BlackRock’s latest commentary,
• We upped our overweight of inflation-linked bonds in March to quickly take advantage of the market pricing lower inflation – our new playbook in action. • Bond yields rose after data showed a still-tight U.S. labor market. We think that keeps inflation sticky and makes Federal Reserve rate cuts this year unlikely. • U.S. inflation data this week will show core inflation remaining well above the Fed’s 2% target. We don’t see the Fed hiking enough to get it all the way to 2%.
Major central banks are hiking rates into recession to try to get inflation to policy targets. Inflation fell when past recessions hit. Pushing inflation to target now calls for a major recession. We expect a recession to help cool inflation but think the Fed will stop hiking before it gets severe. This week’s data is likely to show U.S. inflation staying sticky. We think market pricing is underappreciating persistent inflation and took advantage of the dip in expected inflation in March to up our overweight.
Inflation-linked government bonds behaved more like risk assets in the past, underperforming nominal government bonds in economic downturns. Concerns about bank stability and recession spurred a return of this old behavior last month. That’s the old playbook, in our view. U.S. core inflation is not on track to fall to the Fed’s 2% target, like markets expect (see the green dot above). February Personal Consumption Expenditures (PCE) data confirmed this. We expect the Consumer Price Index (CPI) data out this week to do the same. Lower energy prices and falling goods inflation as consumer spending shifted back to services initially led a decline in core CPI inflation (yellow line). But some goods inflation is already ticking back up. A tight labor market that’s boosting wage growth and services inflation is also making core inflation stubborn. Plus, supply shocks – like the surprise OPEC+ oil production cut – may cause brief spikes in headline inflation (dark orange line)…
… Bottom line: We think U.S. inflation will remain above the Fed’s target for some time. We wield our new playbook and seized the opportunity to add to our existing tactical overweight to inflation-linked bonds in March – one of our highest conviction views. We see structural trends supporting higher inflation, so we’ve been overweight strategically for a few years. We like other assets that help portfolios with higher inflation. Infrastructure assets have the potential to hedge some of the effects of inflation, too. We remain tactically underweight developed market shares and expect corporate earnings to come under pressure – and the upcoming earnings season starting this week may reveal such damage. We prefer emerging market peers that better price in the economic damage we expect.
Now while this all sounds well and good — and frankly quite logical to increase exposure to TIPS (as a hedge) but to the de / dis inflation’istas point, well, all the Muppets are reading Goldilocks latest,
We seasonally adjust weekly credit card, housing, and industrial freight data to gauge the early impact of banking stresses on economic activity in the weeks since the collapse of Silicon Valley Bank and Signature Bank.
We find a sharp pullback in core retail spending in mid-March, as well as some further slowing in industrial freight and housing activity. In contrast, we find resilience in consumer services, and encouragingly, neither jobless claims nor WARN layoff notices indicate a jump in layoff activity. New business applications have also remained broadly stable at a high level.
We lay out our preliminary expectations for upcoming growth releases. We expect a soft patch in the mid-month growth data, with a large miss for March retail sales on Friday, a drop in March manufacturing production and core capex orders, and declines for construction spending and all three home sales measures. We tentatively expect firmer data at the turn of the month, with slightly above-trend GDP growth reported for Q1 and a possible rebound in the April ISM surveys.
HOPE springs eternal and frankly, if you gave me the CPI and ReSale Tales right now, I’m not 100% certain as how markets would interpret the signal and so, how then to trade it.
And there’s somewhat MORE in as far as de / dis inflation’istas — SOME out there are looking at CPI this way and doing so quit publicly in what appears to be an effort not ONLY to ‘inform’ via fintwit but to be noticed, garner attention and, well …
AT Marcomadness2
head of CPI, the forward-looking indicators point to slowing headline that is expected to fall off a cliff by 2025
… It might seem counterintuitive when Bank of New York Mellon Corp. says foreign inflows to Treasuries have collapsed, given the banking turmoil delivered the assets’ best monthly gain since the pandemic. But from a long-term investment point of view such a move makes sense. The risk-reward setup switched dramatically against US government bonds on a relative value basis, especially when you consider the extreme levels of implied volatility that would further drive up the cost to buy and hold them.
The MOVE Index of expected price swings — derived from options that can be used to protect against sudden yield shifts — has retreated from the post-2008 highs touched last month but remains very elevated indeed. Meanwhile, the rally in Treasuries spurred by the turmoil means US 10-year yields are the lowest since late 2020 relative to major peers. Add in some other concerns about poor liquidity, and the debt ceiling, and you can expect foreigners to remain wary about piling in to US Treasuries for some time to come.
Finally, saving the best for last as we collectively continue to wait for Dr. Lacy Hunt’s Q1 missive, the next best thing — Eric Basmajian — has offered a recent note which is worth a few moments of your time. Dare I say, go ahead and print this one and leave on your desk so as you can allow it to sink in and perhaps read through a couple more times (as one does with HIMCO note — or is that just me?)
Three Sequential Signals of Recession - EPB Research
… The concept of the first signal, which we will call Signal #1, is to define a period where the economy is expected to grow below trend or to spot a potential pocket of weakness.
The first warning signal is triggered when the Leading Index falls below 2% growth and the Coincident Indexes, both the Aggregate and the Cyclical, are above 2%.
This signal tells us that in the future, the economy will transition from growing above trend to growing below trend, the first thing that happens on the way to a recession.
… Since 1970, Signal #1 was triggered an average of 13 months before the recession. A few signals occurred without a recession.
When the Leading Index falls below trend, the economy will soon run into a soft patch. This is the first signal that policymakers should start preparing for a potential downturn, likely pausing any restrictive policy.
Signal #1 was triggered in June 2006. The Fed paused monetary tightening around this time, which was appropriate.
Signal #1 was triggered in May 2022. The last time Signal #1 was triggered, in 2006, the Fed paused monetary tightening. This time, the Fed got more aggressive and hiked interest rates even faster after Signal #1 was triggered.
After the Leading Index warns you of below-trend growth, the next signal defines actually arriving at that below-trend growth.
On average, there is an eight-month lag between a Signal #2 reading, which is a reliable recession flag, and Signal #3, the undeniable confirmation of a recession.
This eight-month gap is the most dangerous period for the Federal Reserve and for investors. The recession is virtually assured, but most investors and the Fed still can’t see it or refuse to believe it.
Only when Signal #3 comes does the Fed panic and investors give up as the waves of job losses create defaults and deflationary pressure.
With the Leading Index deeply negative and the Coincident Indexes below 2%, we have a sustained Signal #2.
This signal was triggered five months ago, and the average recession starts six months after getting a Signal #2.
Policy should be easing already as a result of this, but the Federal Reserve is still raising interest rates targeting lagging economic indicators.
Monetary policy has never been this opposed to the business cycle signals in the last 50 years.
I’ll just say that I may still be in the camp with, “…most investors and the Fed still can’t see it or refuse to believe it…” and that is precisely WHY one needs to at least CONSIDER it.
Furthermore, I’m 100% confused as to WHY my personal favorite media operation — BBG — will give so much time to the glass half FULL guys such as Dutta of @ RenMacLLC fame and fortune and little to NONE airtime for a guy like ERIC?
The excess bond premium, a corporate spread measure net of expected defaults and intended to measure corporate bond risk appetite, is signaling a 16% chance of recession over the next 12 months. This is much lower than what we see using Treasury term spreads.
I suppose if you have a view, you economically workbench the data around that view to support it. I cannot help but think BOTH Dutta and Basmajian views are worth noting / reading and following along and not 100% certain as to WHY but there’s something ‘bout Erics PROCESS which feels more authentic … Perhaps its tone or tenor of the delivery. Not sure. Keeping BOTH firmly on MY radar screen and… THAT is all for now. Off to the day job…
