(USTs are MIXED, 'off earlier lows' and on VERY LIGHT VOLUMES) while WE slept; CPI MISS-O-tunities
Good morning … except for those hoping / trading / investing and DIS’in INflation? (Authers OpED noted yesterday as recent example of how powerful HOPE — and graphics with a Bloomberg Terminal — really are). Evidence latest PPI …
BondDad Blog: September producer prices confirm economic tailwind has ended
ZH: US Producer Prices Continue Resurgence In September As Gas Prices & Deposit Services Soar
In an unusual event, we get a look at PPI this week before CPI and expectations are for another MoM gain in September - albeit smaller than the big jump in August. However, US Producer Prices jumped 0.5% MoM (+0.3% exp), lifting the headline Final Demand print up 2.2% YoY...
That is the biggest YoY jump since April 2023 and is up 3 straight months.
… The much-watched portfolio-management segment saw deflation last month (as stock market prices declined) BUT deposit services exploded higher (flight to safety?)...
Put another way …
This is not what The Fed wanted to see.
… and for more PPI victory laps by Global Wall St, see below and as YOU make whatever it is YOU’d like, a kind reminder to do so AFTER yesterdays 10yy auction …
ZH: Yields Spike After Ugly 10Y Auction Sees Biggest Tail Since April; Dealers Stuck Holding Most Paper In A Year
… The internals were concerning because while Indirects took down 60.3%, the lowest since Dec '22 (and clearly below the six-auction average of 66.5), with Directs awarded 18.7% (also the highest since last December), it was the 20.9% allotted to Dealers - the highest since October 2022 - that was a red alert, because with Dealers still unwilling to hold US paper, the Fed may have no choice but to activate the mechanism that allows Dealers to activate the mechanism that permits them to flip their TSY holdings right back to the Fed. A mechanism better known as QE…
… Overall, a subpar, disappointing auction which sucked on both on the top line and also in the internals. No surprise that 10Y yields have jumped to session highs in the moments after the poor auction.
AND if you wouldn’t mind working it all out … BEFORE this mornings CPI and this afternoons LONG bond auction …
… That’d be great …. #GotDURATION? AND … here is a snapshot OF USTs as of 705a:
… HERE is what this shop says be behind the price action overnight…
… WHILE YOU SLEPT
Treasuries are mixed, off earlier lows, and the (10s30s) curve has steepened ahead of today's CPI and 30-year auction events. DXY is modestly lower (-0.1%) while front WTI futures are higher (+0.87%). Asian stocks rose, EU and UK share markets are all 0.5% to 1.0% higher while ES futures are showing +0.4% here at 7:15am. Our overnight US rates flows saw fast$ and real$ buying in 10's to 30's during Asian hours amid a somewhat dull session turnover-wise. Overnight Treasury volume was weak at ~60% of average.… Our first attachment checks in with front WTI futures in a medium-term, weekly chart format. The steady rise in oil prices during September was likely linked to the steady rise in 10y rates last month so that's why the focus this morning. Oil prices are generally respecting support derived by their summer-long range highs (drawn in) but medium-term, weekly momentum (lower panel) is still relieving its deep 'overbought' condition evident at last month's move highs despite the new conflict in the Middle East. Simply, the skew of risks for front crude still look bearish, on balance, despite prices sitting near their presumed support.
… and for some MORE of the news you can use » The Morning Hark - 12 Oct 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).
Moving 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’ (in a similar sorta way you’ll find content if you pay for ZH PREMIUM? except … they are SELLIN other folks data where as I’m just point it out and links provided — should work IF you have permission and should NOT work if you don’t … HOW can THEY do that?? askin’ for a friend as I never understood how they do it…)
Barclays - Federal Reserve Commentary: September minutes: Peak optimism (still thinkin’ one more hike…)
The minutes of the latest FOMC meeting confirm that policy makers became more optimistic that they would deliver a soft landing with little labor market slack, as they bring inflation back to 2%. We maintain our call that the FOMC will hike 25bp before year-end, though not necessarily in November.
… At the September meeting, another rate hike before year-end appeared likely. Since then, data on economic activity and the labor market have again surprised to the upside, strengthening the case for a November rate hike. At the same time, longer-term yields rose significantly, lessening the need for additional policy tightening.
We maintain our baseline forecast that the FOMC will proceed with another 25bp rate hike before year-end, bringing the fed funds target range to 5.50-5.75%. While our baseline case remains for a November hike, we think that in light of the recent tightening in financial conditions, there are significant risks that the FOMC delays the next rate increase.
BMO: PPI Stronger-than-expected at +2.2% YoY (good thing PPI doesn’t translate thru TO CPI… AND … you know … war )
… Overall, there wasn't anything within this morning's release that would materially change expectations for tomorrow's CPI figures … Treasuries continue to benefit from a flight-to-quality bid and there wasn't anything within the PPI release that will offset that …
BloombergBNP - US September FOMC minutes: Finding balance (Fed on HOLD before CUTTING IN JUNE)KEY MESSAGES
The September FOMC minutes showed that after hiking by 525bp, Fed officials see risks as increasingly balanced following several quarters of an almost single-minded focus on inflation.
While the minutes kept open the possibility of further hikes, they simultaneously showed a committee receptive to the prospect that the current monetary policy stance is sufficiently restrictive.
Our view remains that the Fed will hold rates steady through the balance of the year, with the first cut of the cycle in June 2024 as a sustained improvement in inflation dynamics becomes more broadly evident.
DB - CPI trading (CPI MISS-O-tunities)
DB - Trend inflation is half way there (lots of progress BUT still lots of work to do)
Headline PCE 12-month inflation ticked up to 3.5% in August from the post-pandemic trough (3.2%) seen in June, while core PCE inflation declined by about 40bps to 3.9%. Updating our suite of statistical models, we find that our monthly trend inflation measures continued to show progress and declined to 3%, though still historically elevated. Such progress has been encouraging and welcomed by Fed officials, including Waller, who is one of the more hawkish members on the Committee and now prefers to observe more data before making policy decisions. That said, given the surprisingly strong September job report, Fed officials seem meaningfully split on whether they have already achieved a "sufficiently restrictive" stance (See More of the same, just a lot more of it and “Sufficiently restrictive” depends on the data). This makes tomorrow’s CPI data a key input into any decisions regarding the near-term policy trajectory (See September CPI preview).
DB - When to go long the US front-end? (3 conditions to consider WHEN to go long)
Our rates forecast is consistent with a significant rally in the US front-end. The forecast is predicated on the US entering a recession next year and, as a result, the Fed cutting policy rates below neutral.
With real policy rates priced to peak at ~3% (on a 6-month average basis), monetary policy is likely to be tight enough. However, the significant coordinated monetary and fiscal policy easing during covid has resulted in a large transfer of leverage from the private to the public sector balance sheet. As a result, the transmission of monetary policy may turn out to be slower than would otherwise have been the case.
Because of the uncertainty around the speed of transmission of monetary policy, we have so far avoided being outright long the US front-end. Instead, we have favoured forward 2s10s steepeners, arguing that the upside to global term premia should reduce the risks to the trade in a soft landing scenario.
Now that the easy part of the global term premia repricing is behind us, the question of when to go long the US front-end is increasingly relevant. In the current context, there are three logical potential triggers.
Weakness in the labour market, e.g. an increase in jobless claims
Further financial stress, e.g. via US regional banks
A potential shift towards more restrictive fiscal policy
FirstTRUST - The Producer Price Index (PPI) Rose 0.5% in September
… Implications: … Taking a look at the details of today’s report shows that “core” prices – which excludes the typically volatile food and energy components – rose 0.3% in September and are up 2.7% in the past year. Here too, prices are accelerating, with core inflation up at a 4.5% annualized rate over the past three months. The goods sector led prices higher in September, rising 0.9% on the back of higher energy costs. Strip out energy, and goods prices rose a more modest 0.3%. Services prices rose 0.3% in September as higher costs for margins received by wholesalers were tempered by a decline in prices for transportation and warehousing. Prices further back in the pipeline have also accelerated of late. Intermediate demand processed goods prices rose 0.5% in September following a 2.2% rise in August. That said, these prices are down 3.7% in the past year. Meanwhile unprocessed goods prices rose 4.0% in September following 2.0%+ increases in both July and August. Despite the recent jumps, these prices remain down 21.0% in the past year. While modest core inflation readings for producer prices are welcome, data from the CPI reports (September data out tomorrow morning) continue to show that the Fed hasn’t reached the finish line.
Goldilocks - Producer Prices Increase by More Than Expected
BOTTOM LINE: The producer price index (PPI) increased by 0.5% in September, above expectations for a smaller increase. The PPI excluding food and energy increased 0.3%, and the PPI excluding food, energy, and trade services increased 0.2%, in line with expectations. Using interim PPI data (which we seasonally adjust), we estimate a 0.25% month-over-month increase in the PCE medical care services category for the month of September.
Goldilocks - FOMC Minutes Stress Data Dependence in Coming Policy Decisions
BOTTOM LINE: The minutes to the September FOMC meeting noted that “almost all” participants judged that keeping the target range for the federal funds rate unchanged at that meeting was appropriate. Participants emphasized that “the data arriving in coming months” would help clarify the extent of additional tightening needed to return inflation to the Fed’s 2% target, and all participants agreed that the FOMC “was in a position to proceed carefully” in setting monetary policy at coming meetings. Participants also noted that GDP growth “had been expanding at a solid pace,” but expected real GDP growth to “slow in the near term.” Since the FOMC’s September meeting, several FOMC participants, including Vice Chair Jefferson, Governor Waller, and Presidents Logan, Daly, and Kashkari noted that the recent increase in bond yields could substitute for increases in the federal funds rate. We see these comments as a strong signal that the Committee is likely to keep the federal funds rate unchanged at its November meeting, consistent with our forecast.
ING - Rates Spark: Inflation unlikely to beat geopolitics
All eyes are on the US CPI data today and how it fits in with the Fed’s recent change of tone regarding the need for further hikes and the change of mood in long-end rates. Geopolitical unease appears to persist even if the situation seems contained, meaning the front end could be more sensitive to hotter CPI data. A further reflattening would be the consequence
Curves re-flattened driven from both ends
ING - Rates Spark: No mood for 5% right now
The bond bear market bubble has burst, at least for now. Two reasons for this are 1) lower US hike risk, and 2) the elevation in geopolitical tension. Even some firm US CPI data might not change this. But there's no reason for market rates to collapse lower either here, as macro tension remains elevated on the inflation front
The bond bear market bubble has burst
ING - FX Daily: Don’t get too excited with the bond rally
US yields continued to correct lower on expectations the Fed will let markets do the tightening and refrain from hiking again. We suspect, however, that further bond rallies might put a hike back on the table, and limit USD losses. We’ll watch US PPI figures and the Fed minutes today. We have published estimates for the Riksbank’s hedging data out on Friday
NWM - Recap of Minutes from the September 19-20 FOMC meeting (who’s who)
… Judging by comments from numerous Fed officials this week, including some of the more hawkish (e.g., Logan and Waller), policymakers’ views on whether they need to hike again seemed to have shifted since September 20. Ahead of today's minutes, Fed Governor Waller (a hawk) sounded much more balanced than in the past, noting that "The real side of the economy seems to be doing well. The nominal side is going in the direction we want. So we’re in this position where we kind of watch and see what happens on rate. Financial markets are tightening up and they are going to do some of the work for us." Last week (on October 7), one of the most hawkish regional bank presidents, Dallas Fed President Logan also pointed out how the backup in yields was doing the Fed's work for them: "Higher term premiums result in higher term interest rates for the same setting of the fed funds rate, all else equal". This "coordinated shift" from Fed officials lends support to our view that the hiking cycle is probably over. The next major speech will be Fed Chair Powell's appearance before the Economic Club of New York on October 19 (12pm EDT).
UBS - September PPI pulled up by energy, core stable.
Headline PPI pulled up again by strong energy component in September, while core increases remain steady … Trade services (margins) reported a 0.5% increase and have been accelerating on a three-month basis. Ex-margins, however, prices of core services increased a stable 0.3% in September, marginally below the pace year to date. On 12-month basis, headline PPI inflation accelerated from 0.3pp to 2.2% in September, while core inflation stabilized over the past few months and remained below 3.0% yoy.
UBS - FOMC minutes: the Fed update
… Looking ahead to tomorrow's CPI, we expect a core increase of 0.23%. For Alan Detmeister's full write up see this link. That outcome or weaker should bolster the case for the FOMC to stay on hold at the November meeting and potentially beyond. The risk to that would be a large enough upside surprise that leaves the impression core inflation might be re-accelerating; after June's 0.16% increase and August's 0.28% increase, a 0.31% or higher print might cause the FOMC some consternation. Chair Powell has noted that the inflation data has provided "false dawns" before. However, even then, the FOMC sounds content to wait and see.We have expected inflation to surprise the FOMC to the downside, and that fourth quarter growth would look weaker. As a result, we assume the FOMC does not raise rates further, but of course that projection is also dependent on how the data evolves from here.
September FOMC meeting minutes: managing risks
The predominant risk at the time was still too high inflation: "Participants generally judged that, with the stance of monetary policy in restrictive territory, risks to the achievement of the Committee’s goals had become more two sided. But with inflation still well above the Committee’s longer-run goal and the labor market remaining tight, most participants continued to see upside risks to inflation," said the minutes…UBS (Donovan) - Slowly waving farewell to inflation?
US consumer price inflation requires economists to become second-hand car dealers by proxy—the volatility of used car prices explains a lot of inflation uncertainty. Developed economies have experienced three inflation waves: transitory durable goods price inflation has been deflation since December 2022; energy prices are less disinflationary, but crude prices have moved more than consumer prices; profit-led inflation is under pressure as consumers rebel, but some sectors may still expand margin.
Importantly, US middle-income home owners experience lower cost of living increases than consumer prices imply. Owners’ equivalent rent is a price no one pays. This means homeowners’ actual cost of living is significantly lower than reported inflation. Critically, this means their spending power is higher, generating consumer spending resilience. Regional variations also persist—arguably the US has less of an inflation problem, more of a Florida problem.
The Fed minutes led to markets’ data dependence—which is risky because data is not to be trusted in real time, and rogue numbers thus add volatility to policy expectations. We get the ECB account of their last meeting today.
Yardeni - Stocks Ignore The Fog Of War
The stock market continued to move higher today as it has since the beginning of the week despite the fog of war in the Middle East. Bond yields have also declined since Monday. They did so again today despite a higher-than-expected PPI inflation rate. Meanwhile, the price of oil has also declined so far this week.
Perhaps that's because investors and traders have learned in recent years that geopolitical crises in the Middle East don't last long or don't have significant impacts on the global economy. In addition, they may have concluded that just as important as the war in the Middle East are the following developments:
(1) Monday's WSJ reported that Evergrande, the Chinese property giant, is on the verge of collapsing with "a catastrophic effect" on other property developers. That would further weaken China's economy with deflationary consequences for the rest of the world, including for the price of oil.
(2) The WSJ's ace Fed watcher, Nick Timiraos, reported on Tuesday: "A sustained rise in long-term Treasury yields could be bringing the Federal Reserve’s historic rate hiking cycle to an anticlimactic end." The surge in the bond yield since early August could substitute for more FFR increases.
(3) Today's inflation data for September were lukewarm rather than hot. The headline and core PPI increased 0.5% and 0.3% m/m. The price of gasoline jumped 5.4%. It could be flat or down a bit this month if oil prices remain weak.
More importantly, in our opinion, the core PPI for personal consumption was up just 2.7% y/y suggesting that the core inflation rates for the CPI (4.4% in August) and PCED (3.9%) are heading lower (chart). The PPI measure does not include rents, which we know are disinflating sharply.
… And from Global Wall Street inbox TO the WWW,
AT Althea Spinozzi TWEETED yesterday morning (and subsequently noted auction likely short covering rather than ‘haven demand’
As the conflict escalates, 10y UST yields are testing support at 4.56%, which, if broken, might take them as low as 4.37%. Then, the question is whether they'll adjust lower starting a downtrend or rebound. Remember: events are unfolding on the back of weak bond sentiment
CalculatedRISK: FOMC Minutes: "Majority of participants judged that one more increase in the target federal funds rate ... would likely be appropriate"
Kimble - Important Market Breadth Indexes Signaling Risk Off???
ZH: FOMC Minutes Echo 'Hawkish Tone' From Meeting; Fed To "Proceed Carefully"
Ahead of CPI and on heels of recent mortgage market developments, a reminder
OR, if you prefer … in light of FOMC minutes and recent commentary,
AND … THAT is all for now. Off to the day job…
At 12pm PST w/the 10 yr up 11 bps looks like that 4.37 yield is OUT, at least for today.
Thanks for continuing to crank these awesome daily notes out, imagine it's tough to focus on the MARKETS at the moment. May the Lord guide us all in this moment of trial.