Good morning … some news overnight, China Manufacturing PMI dropped to 48.8 against expected tick up to 49.4 from prior 49.2. (or ZH snark and CHARTS HERE for China Factory PMI Slump Worsens As Stocks Tumble Into Bear Market) and which is summarized by Bloomberg,
China’s economic recovery weakened in May as manufacturing activity slumped, prompting investors to sell stocks and call for more stimulus measures to boost growth. The official manufacturing purchasing managers’ index fell to 48.8, the National Bureau of Statistics said Wednesday, the lowest reading since December 2022 and weaker than the median estimate of 49.5 in a Bloomberg survey of economists. A reading below 50 signals contraction. A non-manufacturing gauge of activity in the services and construction sectors slid to 54.5 from 56.4, also below expectations.
… has led to continued bid (drift lower, really) in rates
… a drift to the MIDDLE of triangulating range with still bullish momentum (stochastics, bottom panel) which would lead focus to bottom of range as resistance nearer 3.50%.
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 tagging along with the EGB short-squeeze (5y Gmy -10bp, French 10s -9bps) as lower than anticipated German regional and French inflation prints lend a hand into a solid Euro-bond extension. Weaker China PMIs and SK IP also left a risk-off motif in APAC risk-markets (HSI -2%, NKY -1.4%, KOSPI -0.3%), USDCNH +0.5% and trading through 7.125. Crude Oil (-2.6%) and industrial sensitive commodities are also on the back-foot, Copper -0.7% and SHFE Steel lowest since last November. SPX futures are -9pts here at 7am, while front-end spreads remain tighter (SOFR 2y -1bp). 2s10s curve is -2bps flatter, real yields are leading the modest rally and the belly is outperforming (2s5s10s -1.2bps).… Zooming in on UST 10s specifically, the ~20bp retrace since Friday’s intra-session highs now sees px-action negotiating the former April ‘range trade’ yield highs at 3.64%, while not significant resistance, a move below would be suggestive of a more sustainable consolidation in the near-term towards the 200dma at ~3.45%
Great minds think alike or … nevermind … and for some MORE of the news you can use » IGMs Press Picks for today (31 MAY) to help weed thru the noise (some of which can be found over here at Finviz).
From some of the news to some of THE VIEWS you might be able to use… here’s what Global Wall St is sayin’ …
I’ll begin with this idea which is in reflex TO debt ceiling deal
DB: Delayed, but not derailed
Contrary to our view, the debt ceiling is now likely to be resolved with a minimal amount of fiscal tightening. Other things being equal, this should delay the timing of a Fed pivot relative to our initial expectations. However, this benign outcome should not however alter the fact that the US economy is approaching the end of the cycle.
From a portfolio perspective, we stop out of our June starting 2s10s steepener expressed in UST futures and enter a Sofr 6m 2s10s steepener instead. We also move out our ERZ3/Z4 flattener to a ERH4/H5 flattener. We maintain all our other existing trades for now…
… The Fed's reaction function has already proved to be different than recent cycles. Since the early 80s, the Fed started easing whenever the Willingness to Lend from the SLOOS was around zero. This cycle, the Fed hiked while the Willingness to Lend deep in negative territory. Similarly, UST10Y is significantly higher than implied by the data or other asset classes on models calibrated on the past 15 years.
Same shop and perhaps NOT so DELAYED, it’s annual default study time
Jim (early morning) Reid notes,
This year's study builds on last year's edition where we called for the end of the two decade ultra-low default era as the next US recession was likely to hit by the end of 2023. Beyond the recession, defaults were likely to be more normal versus the past 20 years due to higher inflation, rates and term premium. We reiterate that view this year as the recession gets closer and update our 2024 and 2025 HY and Loan default forecasts. On the positive side, this report always looks at what level of default risk is priced into spreads for the buy and hold investor. On that front there is always a case to hold a diversified credit portfolio over government bonds. The problem this year is that there might be a much better entry point over the next 12 months. See the full report for much more. I can’t help wondering whether I’ll still be working for the 50th edition.
$ and € speculative grade issuer default rates and DB projected path
Turning away from booms and busts and longer term studies TO a chart of POSITIONS from fintwit — so it MUST be of value
Traders shorting "spoos and 2s"?
CFTC speculator positioning on the S&P 500 is the most net short since 2007 while it's the most net short for the 2-year note since 1990.
Hmmm. Haters’ gonna hate (everything) and that in mind, here’s a weekly note from one of the largest sponsors OF tennis major currently underway,
KEY MESSAGES
Market themes:
Our short-term views post-debt ceiling resolution are pro-risk, long duration and long USD.
Our models and outlooks suggest that it may be time to re-enter steepeners with US 5s30s.
Trading consolidation of Japan equities with short autos.
… Data offers opportunity for a steepener: Over the past few months US 5s30s and 10s30s have tended to trade around the upper bound of MarFA™ fair value. We have interpreted this valuation residual as market inflows into an “end-of-cycle” trade or positioning for a recession/ easing cycle. However, more recently due to the debtceiling risk premium and improving activity data, as well as higher inflation data, we have seen a retracement of US 5s30s and its alignment with MarFA™ Macro’s longterm fair value. In contrast, a short-term MarFA™ Trading considers this retracement overdone. Hence we enter a US 5s30s steepener trade with a target of 23bp (upper range of MarFA™ Trading fair-value).
From a rates TRADE idea TO an ivory tower one ahead of Friday’s NFP,
BNPs US employment preview: Job market fever breaking, albeit slowly
KEY MESSAGES
Leading labor-market indicators point to moderating job growth in May. We project nonfarm payrolls at 190k (253k prior) and an increase in the unemployment rate to 3.5% (3.4% prior).
Tighter credit conditions and decelerating profit growth will temper hiring activity, in our view. Risks may be felt disproportionately at smaller firms, where job growth has been concentrated recently.
Statistical adjustments may be temporarily adding to the resilient tone near term. Had the Bureau of Labor Statistics used more typical adjustment factors over the last two months, job gains would have been much less robust.
Revisions to prior months – normally not a focal point – could factor into the Fed’s holistic view of the job market ahead of the next meeting. The unblemished 13-month string of consensus-beating prints has increasingly been revised away.
Pay gains have moderated from 2022’s highs, but remain well above levels consistent with the Fed’s 2% target for price inflation. We estimate a 0.3% rise in average hourly earnings, which would keep the year-on-year rate stable at 4.4%.
Each dimension of the May’s job report will be relevant to the Fed. To the extent officials are recasting their attention to July’s meeting – the “skip” scenario – that would avail them of two employment and CPI reports, and a new Senior Loan Officer Opinion Survey. We expect data to evolve in a way that keeps the Fed on hold in June and beyond, but would not rule out upside surprises that prompt the FOMC to re-engage with rate hikes.
… Seasonality matters. An unusually small adjustment factor in the April report raises the prospect of either (1) additional downward revisions in May or (2) a harsher payback later this year. The BLS subtracted 639k from the raw data to arrive at the reported 253k in April. During the previous expansion, the seasonal adjustment for the month averaged 841k. Had the more historically consistent factor been applied, payrolls would have been close to zero (see left chart below).
NOTED … what coulda shoulda been was NOT because … SEASONALS? AND so, we move along from one ivory tower to … well almost another. This next one actually from the largest runner of ETFs
Markets now accept rate cuts unlikely
Inflation has proven sticky, even as growth weakens. Markets are realizing that policy rates are set to stay higher for longer. We like quality in stocks and bonds.
Tech stocks surged further last week even as debt ceiling talks spurred bouts of volatility. Long-term bond yields climbed on still hot U.S. inflation in April.
U.S. jobs data this week should show a tight labor market is keeping wage pressures elevated. We think that keeps inflation sticky and above policy targets.
…We see the Fed nearing a pause in rate hikes and living with some inflation to avoid the deep recession needed to get inflation near its target. But we don’t see the Fed coming to the rescue of a faltering economy with rate cuts later this year due to the sharp trade-off between inflation and growth. Markets are coming around to our long-held view after having until recently priced in repeated rate cuts in 2023. We think the European Central Bank will hike more, regardless of the economic damage. The Bank of England (BOE) is in a similar position. Markets have priced in as many as four more BOE hikes. We think that might be a bit overdone, as it would be equivalent to the Fed hiking to around 7-7.5% – enough to trigger a severe recession…
Rate CUTS perhaps less likely, then (not surprising) and so I’m turning back TO a note from Goldilocks which highlights,
GS - Two Incremental Debt Limit Developments
Tonight (May 30) saw two incremental debt limit developments. First, the House Rules Committee passed the rule for debate on the debt limit deal by a vote of 7-6…
… Second, the Congressional Budget Office (CBO) released an estimate of the fiscal effects of the debt limit deal. CBO estimates the bill would reduce the deficit by around $1.5 trillion over ten years, similar to but slightly lower than our expectation. CBO estimates the bill would reduce spending next year (FY2024) by around $70bn (0.25% of GDP). However, much of this would likely be offset by other adjustments in the bill and, more importantly, adjustments expected to be made in spending bills later this year as part of a “side agreement” between the White House and House Republican leaders, so we continue to expect the reduction in spending next year under the bill to be in the -0.1-0.2% of GDP range.
AND finally, a couple links / thoughts for our collective inner stock jockey. First from Prof. Jeremy STOCKS FOR THE LONG RUN Siegel,
Important Data this Week May Determine Fed Action
… Yet if data centers are going to spend $1 trillion on chips, they will need to get that money through an increase in prices to consumers and firms using their services. While gains from AI will be uneven throughout society and the economy, it has the potential to be very deflationary by reducing costs and the need for labor. Elon Musk’s Tesla is one example. He proclaimed in his hour-long interview with CNBC that he could have full autonomous cars that drive any roads by the end of the year—based on the AI technology advancements at his company. This has huge impacts, particularly in the trucking industry where there is a shortage of drivers.
The stock market is performing well despite interest rates trending higher because of continued economic strength. Waiting for the recession has been like waiting for Godot—promised to happen but never arriving. So, earnings chug on and downgrades in earnings are yet to come.
I still believe the risks are on the downside. The Fed should definitely stop raising rates and not raise again. Mortgage rates are above 7% again. Another raise in rates will prompt people to ask, “Why am I staying in 1% savings accounts or 0% checking accounts? I should find these higher-yielding money markets or short duration Treasury funds yielding over 5%. Tightening lending standards are not hurting the big banks. They have plenty of cash and deposits are moving their way. It is the regional banks that are still going to be under the most stress, which impact smaller companies. Big companies in the S&P 500 will not have trouble getting funds.
He’s been nothing if not consistently on this side of the debate … for the other side of the coin, we’ll now turn TO Mr. all is well, FirstTrust, who’s weekly is titled,
The stock market finished Friday on a high note, with the S&P 500 index just north of 4,200 for the first time since August 2022 and up 17.6% versus the market bottom in October.
Part of recent gains are related to optimism about the effect of Artificial Intelligence on some high-tech stocks. Another part might be due to signs that Congress and the White House are closing in on a budget agreement that might limit spending growth for the next couple of years while averting a debt default.
But the recent rally also seems related to a general sense of increasing optimism about the broader economy, with investors getting more confident the economy will avoid a recession this year and next.
For the long-term, we remain optimistic about the US economy and the stock market. But we don’t share the stock market’s optimism about the next year or so and think recent data support the case that the US is still headed for a recession.
Economy-wide corporate profits declined 5.1% in the first quarter of 2023, the fastest drop for any quarter since 2020 during the early days of COVID. As some analysts have pointed out, the drop appears to be driven by large and unprecedented losses at the Federal Reserve, a result of the Fed paying banks higher interest rates for them to hold reserves, combined with the Fed’s massive balance sheet.
But appearances can be deceiving. Yes, the Fed is losing more money than ever before, but those losses are due to payments to banks that should lift those banks’ profits. And despite that boost to banks’ profits, economy-wide profits excluding the Fed’s losses were still down 2.7% in Q1…
… We are not often pessimistic about equities and think the long-term is still bright. However, we think there are still problems ahead in the near term and investors need to be prepared.
Oh … Ok. Never mind … Lets find something NICE, then to say.
Barcaps Equity Strategy - Who Owns What: Nothing but Tech
AI buzz masks caution, with key investor types neutral on equities, hedged for downside, long cash and UW Cyclicals. So positioning alone not such a threat to stocks. As Tech is not crowded (we stay OW) FOMO may have legs. But increased market polarisation across regions/factors/sectors is a challenge for active managers.
… Systematic funds and HFs are the main buyers of equities …
THAT is all for now. Off to the day job…
Great work !!!
The actual "wild card" seems to be the Data, out of the BLS.
Makes everyone's job a lot harder, if you can't trust the Data.
I'm biased toward probably stronger means a little higher, for longer.
But we're close to the Fed being Done.