… here is a snapshot OF USTs as of 705a (belly bid highlighted):
… HEREis what another shop says be behind the price action overnight…
… WHILE YOU SLEPT Treasuries are modestly higher and the belly's outperforming after some Spanish and German states inflation readings were found to have cooled this month. Bunds (see attachments) have sharply outperformed Treasuries and Gilts this morning, DXY is modestly higher (+0.2%) while front WTI futures (see attachments and discussion) are showing +2.5% here at 6:20am. Asian stocks were mostly higher with China-linked benchmarks rallying smartly (HS China Ent +6.2%, Hang Seng +5.24%), EU and Uk share markets are little changed though and ES futures are showing +0.2% here at 6:25am. Our Treasury flow color was unavailable at publishing time but overnight Treasury volume appeared pretty solid (~160% of average) with 3's (226%) seeing the highest relative average turnover this morning.
There's obviously lots of focus on tomorrow's JOLTS print and Powell's follow-on speech at a Brookings event. That said, with the 2s10s Treasury curve at its most inverted level in decades, today's Conference Board data could offer a tell as to whether the 2s10s inversion WSJ might be losing thrust/sentiment underpinnings or that it's roughly where it should be. In today's first attachment we show the latest prints in the overlay of Conference Board (expectations-present situation) and 2s10s curve. We've said before, and still think it today, that a weakening in current conditions may be a necessary precondition for a sustainable rebound in 2s10s curve. Indeed, the black line in this morning's first attachment shows that [expectations-present situation] time series increasingly at odds with the 2s10s curve- if one's willing to accept the two scales of this overlay and its messaging. Something to watch for this morning, we think...
… the Tsy 2s5s10s butterfly looks equally sold-out as we show in our next attachment. Deeply oversold too, this 'fly completed a measured move extension (drawn in) last week while looking ripe for a corrective rebound given the momentum set-up in the lower panel.
… and for some MORE of the news you can use » IGMs Press Picks for today (3 NOV) to help weed thru the noise (some of which can be found over here at Finviz).
AND from the Global Wall Street inbox comes a note on bond on vol (NOT good, IMHO) and stocks … from a rather large German bank
It has been about the worst Fed hiking cycle for equities. In the eleven prior hiking cycles, nine saw equities up (8%-29%), one saw them down modestly (-2% in 1994) and only one saw them down significantly (-13% in 1973). The current hiking cycle has already seen equities down a peak-to-trough -25% and a peak-to-current -16%, making it about the worst for equities;
Higher rates? Equities are where they were 175bps ago in rates. The S&P 500 has been at recent levels 4 times over the last 5 months, while rates have been successively and notably higher each time, with the 2y yield up 175bps from the first time, suggesting it is not higher rates that drove the equity selloff;
Or higher rates vol? Equities have tracked rates vol, whose sustained rise during this hiking cycle has a precedent only in the 1973 hiking cycle. While rates and rates vol moved up together in this cycle, whenever they did diverge, as they did in June, in August, and again presently, equities have followed rates vol rather than the level of rates;
We look for rates vol to fall as the Fed slows the speed of hiking and as policy rates are closer to eventual terminal rates. We look for equity vol to fall with rates vol, for systematic strategies to raise equity exposure from extremely low levels, and see the equity rally as having further to go.
From stocks TO the economy — same firm with a catchy ECO outlook for the year just ahead,
In our outlook published a year ago, we argued that 2022 was set to be a critical year for determining whether and how the US economy would return to the “new normal” of low inflation and interest rates that prevailed before the pandemic. Twelve months and nearly 400bps of tightening later, the initial hopes for a painless return to price stability have given way to the reality of a downturn driving the economy back towards the Fed’s targets.
Timing a recession is never easy. While the recent inflation data have shown tentative signs of softening, there are mounting signals that a downturn is still most likely and will in fact be needed to bring inflation back to target. We maintain our expectation for a moderate recession beginning mid-2023 in which real GDP falls about 1.25% over three quarters and the unemployment rate reaches 5.5%.
After contracting by 0.6% (Q4/Q4) in 2023, we anticipate that the economy will grow above-trend in the last three quarters of 2024, leaving full-year growth near the economy’s potential rate (2.2% Q4/Q4). In an initial look at 2025, we have penciled in 2.1% growth.
The US labor market has proven remarkably resilient. A recession is likely to alter that picture next year. We see the unemployment rate exceeding 4% by mid-year and reaching 5.25% by year-end before peaking at 5.5% in early 2024. However, a chronically under-supplied labor market should heighten incentives to hoard workers and limit the extent of the rise in the unemployment rate.
Inflation has likely peaked with the latest CPI print showing some welcome signs of moderation. That said, price pressures remain elevated and broad-based and the downslope is highly uncertain. Aided by a recession, we now see inflation falling more rapidly in 2023, with core PCE and CPI ending the year near 3.25%. While inflation should continue to move lower in 2024, we also see factors that will lead to structurally higher inflation beyond this business cycle, including de-globalization and an aging global workforce, among others.
After delivering the most aggressive tightening cycle since Volcker, the Fed looks set to downshift to a 50bp hike in December. However, we have added one hike to our terminal rate, which reaches 5.1% in May. Risks remain skewed to the upside, and we caution that the transition to a pause and eventual cuts may not be entirely linear. With a sharp rise in the unemployment rate and inflation showing clearer signs of progress, we would expect the Fed should cut rates by 200bps by mid-2024 when it approaches a neutral level around 3%.
Here’s an interesting one from a corner of the earth which is NORMALLY (in years past) extremely optimistic. FirstTrusts
It’s that special time of the year, and we will all hear and read a great deal about Black Friday, Thanksgiving Weekend, and Cyber Monday during the next few days. Many pundits are going to make sweeping conclusions about the economy based on these very limited reports.
Our recommendation: please feel free to ignore this news. Christmas-time spending is a marathon, not a sprint. Slow sales early could be bad news, or it could just mean shoppers are waiting to pounce later; fast sales early could be good news, or it could mean consumers get tapped out sooner. Past patterns are no indication of this year’s results. Even more important: it’s not how much consumers are spending that matters, but how much the economy is producing, which is the ultimate source of future purchasing power.
Instead, focus on fundamentals, like monetary policy and corporate profits. It’s these fundamentals that determine the path of markets in the next year or so. And in that regard, the near future is flashing many warning signs…
… The only way the recent rally turns out to signal that the worst is behind us is if the US somehow avoids a recession. But with monetary tightening (highlighted by a significant slowdown in M2), avoiding a recession is unlikely. This is especially true when we add in the fact that much of the economy, especially in the goods sector, has to get back toward normal after being artificially supported by trillions in temporary stimulus in 2020-21…
… Back in 2020-21 we consistently said that the bill for massive over-stimulus would eventually come due. We are now much closer to getting that bill. Don’t let the time lag, or the belief that the Fed can reverse course just in the nick of time, convince you it’s not coming at all.
AND switching up gears just a bit … this from a rather large British bank
We have been underweight or neutral risk assets for most of 2022. We now turn short-term positive, given lower volatility, signs that economies are still holding up, and some signs of US inflation turning. The path of least resistance seems to be a Santa rally, even if we think eventual fair value is well below spot levels.
Finally, from the charts department, one I think we’d all LIKE to agree on and HOPE it comes to pass…1stBOS,
The anticipated sell-off in Crude Oil is gaining momentum
Brent Crude Oil is seeing a sharp sell-off and has broken clearly below the crucial $83.65 September low and we maintain our negative outlook and expect a test of the 50% retracement of the whole 2020/2022 upmove at $77.56 next ahead of $63.02, the 61.8% retracement.
WTI Crude Oil has also broken below it’s crucial $76.25 September low and the observed sell-off is also picking up momentum. We see next key support at the indicated 38.2% retracement of the whole 2020/22 upmove at $65.25, before the 50% retracement at $45.09.
Note that the Credit Suisse House View is neutral on Brent and WTI Crude Oil on a 3-6 month horizon.
This weakness in Oil should help to not only reinforce our existing core 3-6 month negative outlook on Commodities as an asset class but also we believe put further pressure on US Inflation Expectations to continue to fall.
