Good morning … Um … I realize the past 24-48hrs was global central banking day(s) — BoE HIKES and with a split decision (ZH) … and then there was the hawkish ECB beginning QT in March (ZH) … But … ReSale TALES?
… Credit card spending in October was boosted by the additional round of Prime Day and related promotions, as well as one-off stimulus payments in California (CA).
The disproportionate weakness in total online retail spending and total card spending in CA suggests that there was negative payback in November for the October distortions.
… here is a snapshot OF USTs as of 707a:
… HEREis what another shop says be behind the price action overnight…
… WHILE YOU SLEPT Treasuries have bear steepened overnight with the bund sell-off persisting (German 5's +11.5bp) while Gilts have now turned-tail too (UK 10's +10bp). DXY is little changed while from WTI futures are lower (-2%). Asian stocks were mostly lower, EU and UK share markets are all in the red (SX5E -1%) while ES futures are showing -1.1% here at 7am. Our overnight flows were unavailable at press time and overnight Treasury volume was below average overall (~85%) with some elevated turnover seen in 7's (185%) after a 6.3k TY block buy(?) was posted just a bit ago...
…As for duration, Treasury 10's do love the 3.50% level right now- the former move high from mid-June. Whether 10's or 30's... 3.50% (or for 5's the equiv level is 3.62%) seems to be the rote answer at the moment. While discussing the back-end, next we show an updated look at the Treasury 10s20s30s 'fly.
… and for some MORE of the news you can use » IGMs Press Picks for today (16 DEC) to help weed thru the noise (some of which can be found over here at Finviz).
Its FRIDAY and I’ll try not to labor the point here … I’ll offer a few things / links / items of interest ahead of the weekend and look forward to putting forth something more over the weekend. For now, consider,
ZH: Here Comes The Job Shock: Philadelphia Fed Admits US Jobs "Overstated" By At Least 1.1 Million
Total federal debt has risen in every year since the 1950s. It even rose during the supposed budget surpluses back in 1999-2000. A little bit of debt is not a problem, but when the total debt gets up to a really high level, it becomes a really big problem.
This is because even Uncle Sam has to pay interest on the public debt. The US gets a better rate than anyone else, because repayment is always guaranteed, even if it is just with overprinted money.
This week’s first chart looks at the effect of interest rates on those payments. Back in 1981, the total federal debt only amounted to 31% of GDP, which was the low point of the last few decades. But interest rates on that debt were really high, thanks to Fed Chairman Paul Volcker thinking that higher rates would help conquer inflation. And so at the worst point of those high rates later in the 1980s, the cost of paying interest on that debt accounted for more than 50% of total tax receipts.
Thankfully for all of us, the lower interest rates have meant a lower portion of the federal budget going toward interest rates. But that only remains true if interest payments remain low…
… Bottom Line: The USA cannot afford to see interest rates have a repeat of the big spike in the late 1970s. If rates go above 10% on a sustained basis, it will be Weimar Republic time. Just getting up to 5% would really REALLY bad, and that is nevertheless what the Federal Reserve seems intent on doing.
Well THAT is interesting and a topic of discussion throughout my former career and to this day… Moving along then to one of the reasons / drivers of higher rates — the ‘flation. Here is a hot take from Goldilocks
Not only did global inflation increase rapidly in 2021 and 2022, but upside inflation surprises around data releases also increased sharply. These surprises appear to be settling down, however, and this week’s second consecutive US CPI miss punctuates a broader negative swing in global inflation surprises over the last few months.
There are three main reasons why inflation surprises rose sharply in 2021 and 2022. First, tradeable goods, whose globally set prices are more likely to lead to common surprises across countries, largely drove inflation surprises in 2021. Second, inflation surprises typically increase following large changes in food and oil prices, so the surge in commodity prices in 2022H1 was also a key driver of upside inflation surprises. Third, economic reopening led to inflation dynamics that were both unusually synchronized across countries and not well captured by standard inflation forecasting models.
The good news is that the three forces that we believe drove upside inflation surprises in 2021 and 2022 are either reversing or in the rear-view mirror. An improved supply situation is starting to deliver a deflationary goods impulse and commodity prices have fallen in 2022H2, both of which suggests that the recent downside surprises will continue. In addition, the bulk of economic reopening is finished in most countries, so we see less scope for synchronized inflation surprises going forward.
We therefore expect that global inflation surprises are likely to remain tame, if not negative, going forward. The moderation in inflation surprises we expect is one key reason why we see lower upside risk to global inflation in 2023 than in 2021 and 2022.
The European Central Bank (ECB) delivered a 50 basis point hike, taking its Deposit Rate to 2.00% at today's monetary policy meeting, while also announcing plans to begin quantitative tightening from March.
The ECB's accompanying commentary and press conference were also hawkish in tone. The ECB forecasts above target inflation over the medium term, while ECB President Lagarde signaled that interest rates would keep rising at a rapid pace for now, and perhaps by more than market participants expect. Accordingly, we now forecast another 125 basis points of rate hikes during the first half of 2023, which would see the Deposit Rate peak at 3.25%.
The Bank of England (BoE) also raised its policy rate by 50 basis points to 3.50%, although the tone of its accompanying comments were more balanced. Still, the BoE said the labor market remains tight, wage growth is elevated, and that it will act forcefully as needed. That does not sound like a central bank that views an end to monetary tightening as imminent. We now forecast two more 25 basis point rate hikes from the BoE, which would see the policy rate peak at 4.00%.
The Swiss National Bank raised its policy rate 50 basis points to 1.00%. It's accompanying comments leaned hawkish, and the central bank forecasts CPI inflation creeping back above the 2% inflation target by 2025. Against the backdrop, we expect a final 50 basis point rate hike from the Swiss National Bank in Q1-2023.
Norway's central bank raised its policy rate 25 basis points to 2.75%, while adding that inflation has been a bit higher than expected, the labor market has been sturdier than expected, and the outlook for mainland GDP growth is less pessimistic than previously. We remain comfortable with our forecast for two more 25 basis point hikes from the Norges Bank in January and March, which would see Norway's policy rate peak at 3.25%.
Ok then … moving right along TO a note from Barclays offered in the morning (before TICS report),
Flow of Funds: Who is buying? The Fed recently released the Q3 2022 flow of funds data, which shed light on the fixed income supply/demand dynamics as the Fed ramped up QT. Banks significantly reduced holdings, while the foreign sector and households pared back purchases. Mutual funds were net buyers and pension funds stepped up.
In as far as some CHARTS go …
AllStarCharts (for the somewhat less initiated) asks,
So, if bonds are breaking out to fresh multi-month highs, we should buy bonds, right?
Here’s a quick look at the bond market buy signals triggered earlier in the month:
All three are still in play.
The five, 10-, and 30-year Treasury futures continue to churn above our risk levels. As long as that’s the case, we want to remain long toward our upside objectives.
If you missed these breakouts or wanted to wait for additional confirmation, the two-year T-note offers another chance to capture a tactical bounce.
Check out the daily chart of two-year T-note futures:
We want to see a decisive break above the October pivot highs like the longer-duration notes. If and when it closes above 103’01, we’re buyers on strength with a target of 105’12.
Remember, these are tactical trade setups. Could these turn into sustained uptrends? Sure. That’s not the bet we’re making, though…
For a somewhat more cerebral and professional approach, 1stBOS CoTD on US v Ger
Chart of the Day: After a plethora of central bank meetings, the ECB saw the biggest market reaction following a clearly hawkish message on both interest rates and QT. Most notable was the very aggressive underperformance of German bonds on a cross market basis, in line with our bias. The US/Germany 10yr Bond Yield spread has resultantly broken major support at the 2022 low at 149bps, which opens up a move to 124.5/24bps next, then the 2020 low at 103/100bps. We also stay biased towards a move to 155.5bps in the 2yr US/Germany Bond Yield spread.
Reading on further you’ll note the firm remains ‘tactically bullish’ 5s, 10s vs 3.845% and 30s with ‘stop’ (ie levels of pain to watch) are 5s vs 4.045%, 10s vs and 30s vs 3.715%. Same firm offered,
* We have consistently maintained the view that the October/December rally in the S&P 500 has been a bear market rally, with strength having extended to our recovery target and key resistance cluster, starting at the 200-day average at 4032 and stretching up to 4155.
* Whilst we acknowledge the risks to our view (large net short and consensus bearish positioning/views), we maintain our core bearish outlook and look for the completion of a (small) top in due course.
From bonds TO stocks and this one from Bloomberg.com,
Markets have whipped around without obvious immediate triggers often enough in recent weeks to raise concerns that positioning is ruling the roost rather than fundamental drivers. Consider as an example the way the Australian and New Zealand dollars started sliding in Asia on Thursday, within hours of strong economic data that drove up rate-hike bets.
But a greater shock from position plays could be brewing in equities, where Nomura Securities International’s cross-asset strategist Charlie McElligott has spotted the potential that a key group of hedge funds may be forced to dump $30 billion of global stock futures. The S&P 500 is testing its 100-day moving average and other benchmarks are also hovering in danger territory. Perhaps that means a year-end rout is brewing, though it’s also possible that such concerns will help defend levels like that line for the S&P that have set off rebounds before.
More over the weekend. Happy Chanukah to all who celebrate!! THAT is all for now. Off to the day job…
