(USTs are MIXED, steeper on average volumes) while WE slept; 2011 called and wants it ratings headline back ... US response? It's "arbitrary"

Good morning … 2011 called and it wants it headlines back?

HERE is the rest of the commentary AND for some of the snark,

ZH: Fitch Cuts USA's AAA-Rating, Cites "Fiscal Deterioration, Erosion Of Governance"

And … The Hobbit offers her official response

HERE is the rest of the statement and … She’s clearly mad as hell and she’s NOT gonna sit by idly and take this. Or is she. Is this result OF BidenOmics OR is this a TRUMP downgrade (yes, already heard Team Biden classify it as such)?

Now with month end now fully in rear-view mirror AND Treasury duration supply coming one can only HOPE for the same 2011 outcome OR we’ll all be paying dearly for the policies and politics which brought us to this next downgrade chapter.

On SUPPLY and ISSUANCE, via Harkster daily letter (The Morning Hark),

…As "expected" as this rating downgrade can be, it comes at a pivotal time for the US Treasury ahead of the US Quarterly Refunding Announcements and tonight's auctions. Prometheus Research have released this mng a timely piece about the Treasury Issuance Impact. How will the mkt digest the almost $1.9 trillion of paper due to hit the street in H2? What clearing rate will the private sector be comfortable with to take down this long duration debt? 

Here a couple charts for some context …

30yy DAILY looking overSOLD (yellow arrow) and while maybe NOT opportune time to say / think out loud of BUYING — ahead of gargantuan amount of issuance headed our way, maybe just maybe the wisdom of crowds (selling — or simply NOT BUYING — lately) is doing so at the precise wrong time?

Clearly the UPTREND is in place and I’ve had to redraw TLINES several times and I’d frame it this way … the closer we get TO the top of the TLINE (~4.20%) the more I’d look for some sort of shorter-term opportunity to FADE…I’d ALSO be more inclined to hold my nose and BUY if stocks became unglued quickly…Moving to the 10yy perhaps more / most buyable at / near TLINE …

… TLINE today approx 4.07% and this extremely close TO July AND March cheaps … 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 with the curve pivoting steeper around a little-change 20-year after Fitch (after years) joined S&P in downgrading the US credit rating to AA+ from AAA. DXY is little changed while front WTI futures are higher (+0.85%) after the API reported a sharp drawdown in Oil inventories (link above). Asian stocks fell across the board (Nikkei -2.3%), EU and UK share markets are all in the red (SX5E -0.8%) while ES futures are showing -0.5% here at 6:55am. Our overnight US rates flows saw a risk-off Asian session after Fitch's downgrade of the US thought flows were notably quiet with slightly better buying reported. In London hours the desk reported real$ buying in Bills out to 3yrs with selling/steepening from LDI names further out the curve. Overnight Treasury volume was about average all across the curve…

• Treasury 30yrs, daily: Sailing in clear(er) air now that 4.045% range support has been taken out. As discussed before, 6-7 separate bouts (the red ghosted circles) of buying near the 4.00% level since last year put a range cap on bonds at the level. Now all those buys are underwater... Will that new reality cool the jets of the wanting real$ buyers until prices at least stabilize again??

  

• Treasury 20+ year ETF (TLT's), daily: TLT's closed on their channel support yesterday, as drawn in and highlighted in the shadow box in the upper right. For those keeping score, 98.11 is that channel bottom today.

• Treasury 10yr yields, daily: The general steepening trend in the 10s30s curve since July 6th means that 10's are a little behind 30yrs in probing their major range support that we'd spot at ~4.09%, as illustrated. A key level to watch where a break and close above it would guide our gaze to next-support near 4.22%. Anyway, the 4.09% area remains your key support for 10's.

… and for some MORE of the news you can use … head TO Harkster (app HERE for example) AND Finviz too…

From some of the news to some of THE VIEWS you might be able to use… here’s what Global Wall St is sayin’ … importantly as we move from Mondays SLOOS data to yesterday’s JOLTS data, I’ll be honest with you and all I’ve seen / read so far in sum total seems to add up and align more with Rosies less than rosy view of the current state of things.

Which then ALSO is corroborated by HIMCO (noted HERE and interview then a week later HERE)

And while I’m sympathetic to BOTH Rosie AND Lacy, i’m also and always a fan of any / all messages from the markets and to this point, i’ve not yet seen ANY concrete signs of a run TO FI or trend changing STEEPENING which I’d have thought to be the case … Perhaps the FITCH NEWS will be just what the doctors ordered?

DB US Downgraded: 5 Quick Takes

On Tuesday after the market close, Fitch Ratings downgraded the US long-term debt rating from AAA to AA+. It cited the expected fiscal deterioration, a growing debt burden, and an “erosion of governance” resulting in repeated debt ceiling standoffs as reasons for the downgrade. Fitch also replaced the Negative Watch with Stable Outlook after the downgrade. We share some quick reactions to the news.

Tempest in a teapot? Beyond the bad optics and initial shock of the news, the downgrade is unlikely to trigger any large selling of Treasuries or a fundamental shift in investor behaviors. One reason is that investors have lived through the S&P downgrade in 2011 and remember coming away unscathed. Another might be that people have gotten used to an elevated level of deficit spending. The budget deficit, after falling by half since the peak of the pandemic, has been on the rise again since late last year, and the CBO has made several upward revisions to its baseline deficit projections during this period. Fitch’s rating change helps draw attention to the issue, but it does not constitute breaking news…

… Timing is poor, if not unfortunate. With traders on vacation and away from their desks, markets are thin and susceptible to knee-jerk reactions to the news. This is compounded by existing jitteriness leading up to the Treasury refunding announcement on Wednesday. Markets could gap slightly at the open with a continuation of Tuesday’s moves in the direction of higher yields, a steeper curve, and tighter swap spreads. However, we see the market impact from the downgrade news as ultimately limited, and Friday’s jobs report could trump the downgrade news as monetary policy is still the dominant driver for yields.

Catalyst for higher term premia? … We remain in steepeners and would also recommend selling spreads on larger-thanexpected issuance increases on Wednesday.

DBs Early Morning REID reaction

Just when you thought it was safe to unwind into your holidays, after Europe went to bed last last night, Fitch Ratings downgraded the US from AAA to AA+ in a surprise move reminiscent of S&P's back in August 2011. The rating agency had initially put the US on ratings watch back in May during the debt ceiling fight. In a corresponding statement, Fitch cited that tax cuts and new spending initiatives coincided with multiple economic shocks to rapidly grow the government’s debt burden. The rating reflects the political brinkmanship reflected in the debt ceiling fights, but also takes into account the forecast debt-to-GDP ratio which Fitch estimates will reach 118% by 2025, with the median AAA rated ratio being 39%. See our rates strategists' immediate reaction to the decision here with one of the takeaways being that it should continue to help reprice term premium going forward. Obviously S&P being the first to downgrade 12 years ago was far bigger news and has allowed investors to adjust for the most important bond market in the world not being a pure AAA anymore but it's still a big decision. Treasury yields sold off aggressively yesterday before the announcement due to concerns about the upcoming funding announcement as we’ll see below but have been a bit confused since the announcement as they initially rallied on a global risk-off move and then sold off to be c.1bps higher in Asia.

… The downgrade follows an interesting story that has been bubbling under the surface around the US deficit and what that means for issuance and yields. 10yr Treasuries rose +6.4bps yesterday, before the Fitch news, to the highest level since the first half of July and 2s10s steepened +3.9bps in what seemed to be a delayed reaction, in thin markets, to Monday's surprise announcement from the Treasury of a larger than expected borrowing estimate for the rest of the year. 30yr yields rose +8.2bps to 4.092% and are now at their highest levels since November. Today sees the subsequent refunding announcement at 8:30am EST where we’ll know more about the issuance pattern in the next few months. See our rates strategists' preview here where they say their expectations have been boosted by Treasury borrowing over the next 5 months that is $500bn more than they originally expected.

DB: Quick thought - US Downgrade

Fitch downgraded the US credit rating to AA+ yesterday. Earlier that day, we had warned of overly complacent sentiment among investors and named 4 reasons (link). We now have 5.

Today’s equity market reaction is once more surprisingly complacent. Last time (and also the first time) the US was downgraded by one of the large rating agencies was on the 5th of August in 2011. S&P downgraded the US to AA+, while Fitch kept its AAA rating for the US.

On the day after the downgrade, the S&P 500 dropped almost 7% and the STOXX Europe 600 fell by 4%. From the day that S&P signaled a high likelihood of a downgrade on the 14th of July until the FOMC calmed markets by confirming its dovish stance on the 9th of August, the S&P 500 fell by 10% and the STOXX Europe 600 declined 13%.

Of course, the situation was different in 2011. Still, the difference in the market reaction is surprising. As we write, the STOXX Europe 600 is down by merely 1%. Since Fitch put the US rating on watch (24 May 2023), the S&P 500 is up 11.5% and the STOXX Europe 600 is up 2.5%.

Market reaction in 2011

GS USA: Fitch Downgrades US Sovereign Rating

BOTTOM LINE: The downgrade mainly reflects governance and medium-term fiscal challenges, but does not reflect new fiscal information. The downgrade should have little direct impact on financial markets as it is unlikely there are major holders of Treasury securities who would be forced to sell based on the ratings change.

UBS: Things which do not matter

One of the credit rating agencies (it does not matter which) downgraded the US government from something (it does not matter what) to something else. Markets care about the fiscal position of the US, and the repeated farce of the debt ceiling debacle. They do not care what credit rating agencies think about the matter…

ZH: Wheels Come Off The "Strong Jobs" Myth: Job Openings Drop To 2 year Low As Number Of Hires And Quits Plunge

… he BLS just reported that in June the number of job openings was practically unchanged, dropping by just 34K, to 9.582MM from a downward revised 9.616 million. And while the monthly change was modest after the downward revision of course, the total was dragged to the lowest level since April 2021.

The number was about 1.4 million below the 11 million from a year ago and below the consensus estimate of 9.6 million, a rare miss in a series which has been best known for decisively beating Wall Street's expectations.

AND so, with that in mind, a few sellside observations ON said JOLTS (and ISM)data

BARCAP June JOLTS data indicate incremental slowing in labor demand

Job openings declined in June, to 9.58mn from a downwardly revised 9.62mn, while the ratio of job openings per unemployed held steady at 1.6. The hiring rate eased to 3.8%, the lowest level since October 2019, and the quits rate also moderated. On balance, the data indicate an incremental easing in labor market conditions.

BMO JOLTS Lowest since Apr '21; ISM Manf. Misses - UST Retain Selloff

ISM Manufacturing in July rose to 46.4 from 46.0, but came in below the 46.9 forecast with prices paid rising to 42.6 from 41.8 and employment dropping to 44.4 from 48.1. Further within the details we saw new orders bounce to 47.3 from 45.6 and inventories climb to 46.1 from 44.4; the spread between new orders and inventories stayed positive for the second month after thirteen consecutive sub-zero reads. Additionally, the report flagged, "Amid mixed sentiment about when significant growth will return, panelists’ companies reduced production and continued to manage head counts down, to a greater extent than in previous months."

On the labor demand front, JOLTS job openings disappointed, falling to the lowest level since April 2021 at 9582k from 9616k compared to the 9600k forecasts in a positive (from the Fed's perspective) indication of moderating labor demand in June. The quits rate also declined to 2.4% from 2.6% - matching the lowest since January 2021 as workers are becoming less willing to resign in pursuit of presumably higher wages.

Treasuries were definitively on the back foot ahead of the data with 10-year yields back above 4% as the curve bear steepened. Since the new information has hit the tapes, after the modest kneejerk bull steepening response, selling pressure has resumed ahead of tomorrow's refunding announcement even as the data shows mixed manufacturing sentiment with waning labor demand

FirstTrust: The ISM Manufacturing Index Increased to 46.4 in July

Implications: Activity in the US factory sector contracted for the ninth month in a row in July, though at a slightly slower pace. Looking at the details, only two of eighteen industries reported growth in July. We continue to believe a recession is on the way and today’s report shows the goods sector of the economy is likely to lead the way…

GS USA: ISM Manufacturing Increases Less than Expected; Job Openings and Construction Spending Roughly in Line with Expectations in June

BOTTOM LINE: The ISM manufacturing index increased by less than expected. The composition of the report was mixed, with increases in the new orders and production components but a decline in the employment component. Job openings decreased by 34k to 9,582k in June from a downwardly-revised level in May, roughly in line with consensus expectations. After incorporating today’s JOLTS data, our jobs-workers gap based on the JOLTS, Indeed, and LinkUp measures of job openings stands at 3.0mn workers. Construction spending increased in June, roughly in line with consensus expectations, while May growth was revised up and April was revised down slightly. We left our Q3 GDP tracking estimate unchanged at +1.5% (qoq ar) and our Q3 domestic final sales growth forecast unchanged at +1.3%. We launched our past-quarter GDP tracking estimate at +2.6% (qoq ar) compared to +2.4% as originally reported.

ING: US industrial activity feels the headwinds

The US service sector continues to perform relatively strongly, but manufacturing is struggling as highlighted by the ninth consecutive contraction of the ISM report. Meanwhile, residential construction is rising due to a lack of homes for sale, but non-residential is starting to feel the squeeze from tighter lending conditions

ISM surveys & US GDP growth (YoY%)

NWM: US: Manufacturing ISM Index

The ISM manufacturing index was little changed in July. The headline index inched up to 46.4 (consensus 46.9, NWM 46.0) in July from 46.0 in June and continued to signal a contraction in factory sector activity for the ninth consecutive month. The ISM report noted "The past relationship between the Manufacturing PMI and the overall economy indicates that the July reading (46.4 percent) corresponds to a change of minus-0.8 percent in real gross domestic product (GDP) on an annualized basis."

WELLS FARGO June JOLTS: Labor Market Continues to Slowly Simmer Down

The jobs market remains exceptionally tight but continues to show incremental signs of loosening. Since the Fed began tightening policy in March 2022, job openings have fallen 20% while the unemployment rate has trended sideways. This marks an encouraging step toward inflation subsiding without a recession, but with price growth still elevated and a pullback in demand for workers ongoing, a "soft landing" remains far from assured, in our view.

WELLS FARGO Message from ISM: Recession Likely, Not Inevitable

The ISM notched a ninth straight month in contraction in July as employment fell to a 3-year low. Yet new orders rose to a 9-month high as production also improved. The signal from the ISM is bleak, but the 1990s mid-cycle slowdown was just as bad. Recession is likely but not inevitable.

And in OTHER news completely related to all things global macro and US rates, the US consumer may just be showing signs of strains,

LPL: Credit Card Balances Foreshadow Weakening Consumer

Key Takeaways:

• Credit card debt hit a new high in the first quarter of this year, just shy of a trillion dollars and rates on card debt also hit a new high since the data series began in 1972.

• The average credit card debt at the end of last year was over $7,200 and half of those individuals say it would take over a year to pay off that balance.

• The trajectory for consumer spending will likely downshift when credit card bills come due.

… Typically, card balances fall in first quarters, but sometimes consumers present an anomaly. This year along with 2000 and 2001 were the only years where Q1 balances did not fall. Balances are growing amid higher credit card rates. At the end of last year, the average debt for card holders who had unpaid balances was over $7,200, and the most concerning part is survey respondents confess that it would take over a year to pay off those balances.

Credit SCHMEDIT, right. At least the folks are still gainfully employed which we expect to hear AGAIN on Friday … a few observations ON jobs,

BARCAP US Economics Research: ADP employment: Forest through trees

The ADP employment report underwent a significant retooling last year that switched it from a forecast indicator to an independent measure of nonfarm payroll employment. Although its forecast accuracy has seemingly deteriorated, the possibility that the official BLS numbers understate Q2 gains is hidden in plain sight.

… Fed research that attempts to infer true changes in payroll employment from the two series using state-space estimates puts about equal weight on the two measures, suggesting that an average of the two estimates might be regarded as a rough approximation of "the truth". 

...but this misses a key point: Recent BLS estimates may be much too low
Although it is not possible to determine whether the ADP estimates through June align with the Fed's estimates, we have good reason to believe that these are similar, given that they use the same basic methodology and data. If so, then findings from Fed research would seemingly apply. Far from being a forecast indicator that can be safely ignored once the official BLS estimate has been released, the strong estimates from the ADP microdata may be sending important signals to the FOMC that the official estimates undercount employment gains. That is, private payroll employment gains during Q2 may well be about midway between the ADP estimate of 352k/m and the BLS estimate of 197k/m.

BNP US July jobs preview: Pressure ease, but hiring pace to remain robust

KEY MESSAGES

• The modest acceleration in the pace of payrolls and tick lower in the unemployment rate we estimate for July are unlikely to change our projection for a September FOMC ‘skip’. Our forecast would still leave the pace of job creation below the 3-, 6- and 12-month moving averages – consistent with a gradual but persistent easing in the labor market.

• A rising share of government-sector jobs will keep masking a more rapid deceleration in private sector hiring. While healthcare and education have remained the backbone of job growth, more cyclical trade, transportation and leisure industries recently cut back on hiring.

• Average hourly earnings growth will likely decelerate on the back of lower openings, hiring and quit rates—which would provide further evidence to the Powell-Fed that labor conditions are coming into better balance.

AND … before I quit while I’m behind — SKED UPDATE — travelling for business tomorrow so there will NOT be any regularly scheduled daily / morning update. For a full refund or credit, kindly reach out to … oh, wait, nevermind … Freedom isn’t free (but this ‘stack’ IS) and so thank you in advance for your patience.

Catch up Friday and … THAT is all for now. Off to the day job…