#Got10s? There are some who MIGHT want (need) USTs and will be considering them ahead of final coupon auctions (aka liquidity events) of the year … DB highlighting recent POSITIONS from evil speculators…
… HEREis what this same shop says be behind the price action overnight …
… WHILE YOU SLEPT Treasuries are higher and the curve flatter after Treasury Secretary Yellen said that she expects US inflation could be much lower by the end of next year. DXY is little changed while front WTI futures are lower (-0.8%). Asian stocks were lower (last week's big winners in HK about -2% to -3%), EU and UK share markets are modestly lower on balance while ES futures are showing +0.3% here at 6:45am. Our overnight US rates flows were unavailable this early and overnight Treasury volume appeared ~85% of average overall with some above average turnover seen in 3's (124%), 5's (103%) and 30yrs (113%).
TLT's, daily: Deeply overbought from a short-term perspective, TLT's confirmed a new tactical, momentum 'sell' signal on Friday. Even so...
TLT's, weekly: The rally off October's move low looks on rails still based on weekly momentum (lower panel). So the same base conclusion in this morning's second bullet applies here too.
Unsure of WHO will be involved in this weeks auction (or driving the final weeks of the year in as far as TRADING goes) but these visuals highlight the push / pull of daily / weekly charts …
… and for some MORE of the news you can use » IGMs Press Picks for today (12 DEC) to help weed thru the noise (some of which can be found over here at Finviz).
Central bank policy decisions dominate the calendar this week. Although the Federal Reserve’s June policy errors included the trashing of forward guidance, markets are not likely to be surprised by the decisions this week. Instead, the focus is on when rates peak out, with investors already debating the easing cycle.
UK October GDP data was slightly stronger than expected—manufacturing contracted less than expected and construction was strong. The chaos of the short-lived Truss government will not have had time to influence this data. The consequences of those policy errors will have impacted decisions that will affect future month’s data.
A major corruption scandal has hit the European Parliament. The government of Qatar has denied association with the allegations. Markets have not reacted. This is like the lack of reaction to the failure of the crypto firm FTX—the irrelevance of an institution to financial markets is seen most clearly when a crisis hits.
As cold weather hits Europe, the UK has put coal-fired power stations on standby. French nuclear energy production has increased. The cold weather is likely to be monitored by markets concerned about the economic disruption of power cuts, although European consumers and companies have adapted by increasing energy efficiency.
Nick Colas on 2yy and what they mean for equity prices,
2-Year Yields and Stocks
… Topic #2: A review of 2-year Treasury yields for 2022 YTD and how they relate to stock prices. The blue line in the chart below shows the progression of 2-year yields this year. These reflect the market’s view of current and near-future Federal Reserve monetary policy.
As highlighted in the chart, 2022 has been a tale of 4 distinct periods:
From the start of the year to June 16th, 2-year yields moved sharply higher (from 0.7 percent to 3.14 pct) and the S&P 500 fell 23 pct.
From June 17th to August 16th, yields stabilized around 3.2 percent and the S&P staged its best rally of the year, up 17 percent.
From August 17th through October 12th, 2-year yields surged higher again, going from 3.3 percent to 4.3 pct. The S&P fell 16 percent over this period and made its YTD low on the last day of this sequence.
From October 13th to the present, 2-year yields have been stable again, this time at around 4.3 percent (although they did briefly get as high as 4.7 pct in early November). The S&P rallied as much as 14 percent (through November 30th) on this more recent stable period for 2-year yields but is currently up only 10 percent from its October 12th lows.
Takeaway: this is the clearest way we know to show how Fed rate policy uncertainty has moved stock prices this year, and it says we should be doing better than we are. Two-year yields remain stable, but the S&P is down 3.6 percent from its recent November 30th high. We suspect this rally is fizzling because, as we discussed last week, the 2 – 10-year Treasury spread has been hitting 1981-type levels. At the margin, this is causing incremental recession concerns, since it signals that Fed monetary policy is excessively restrictive. The bottom line here is that there is a lot riding on this week’s FOMC meeting and Chair Powell press conference. If Powell keeps to his “stay the course” messaging, US stocks may end up searching for the fabled “Santa Claus rally” until after Christmas Day.
Speaking of the FED, THIS NEXT NOTE is Monday morning QB from MSs Seth Carpenter and his latest world view asking
What Could Derail the Fed’s QT? As we near the peak in the Fed’s hiking cycle, I am getting more questions about what might stop or slow the Fed’s QT program. There are a few candidates for how that might happen.
Our base case is that QT ends organically, with the Fed reading money markets to gauge when they have left “ample” reserves—that is enough so that money markets won’t seize if there is a shock, but a lot less than is there now. Of course, the Fed’s QT plan already states that they will slow QT before the end . So, some slowing will happen regardless. But what about surprises that derail things? The Bank of England paused QT when the gilt market was destabilized. For the Fed, a different part of the market will be more in focus—money markets. There are three dates that spring to mind as focal points to watch.
Money markets are directly tied to the liability side of the Fed’s balance sheet, especially bank reserves and the reverse repo facility (RRP). Reserves peaked at about $4¼trn late last year and have fallen sharply to about $3trn. Much of the decline predates QT, because banks were willingly shedding nonoperating deposits as market rates rose. Money funds became a more attractive destination for those investors, and the money funds placed the cash with the Fed at the RRP facility. One Fed liability fell, another rose. But recently, the RRP facility has come off its peak a bit and sits at about $2½trn. The sloshing around of these liability items are manifestations of swings in money markets.
Whether or not any of this matters TO the equity markets, well, is NOT topic of this weeks ‘warmup’ by MSs Mike Wilson. THIS WEEK he talks of
Inflation Data and Fed Is Yesterday's News; Focus on Earnings Risk This week's focus is likely to be centered on CPI and the Fed. To us, that is yesterday's news; while it's important for the next week / year-end trading ranges, the final chapter to this bear market is all about the path of earnings estimates, which are far too high, in our view.
… Where our bearish views differ from many we speak with... Beyond our Q1 price low (3,000-3,300) and '23 EPS expectations ($195 base case), which are both below buyside consensus based on our client dialogue, there are several other areas where our view seems to be differentiated from those that are directionally bearish. For one, we're in the bust-boom (i.e., 1940s-1950s) camp, not the stagflation camp. We're also acutely focused on negative operating leverage and margin compression being the dominant drivers of earnings downside next year, not top line. We see the earnings excess as being quite broad across industries— forward EPS is >10% above pre-covid levels for ~85% of S&P industry groups. Further, the magnitude and timing of the earnings decline we expect implies that labor market risk may be underappreciated. Finally, our attention is on the soft/survey macro data (a lot of which is near historically depressed levels) because it leads the hard economic and earnings data..
…In terms of the soft data, we think it's worth pointing out that CEO confidence is at one of its lowest readings in history. The relationship between this series and the ISM PMI is strong over time and points to a low 40s PMI in the near future (Exhibit 7).Further, small business confidence and consumer confidence are also at historically depressed levels (Exhibit 8 and Exhibit 9).
A glimpse into the inbox of Global Wall Street narrative creators would be nothing at all without something from Goldilocks on the upcoming FOMC meeting and so,
Aside from a widely expected 50bp rate hike, the main event at the December FOMC meeting is likely to be an increase in the projected peak for the funds rate in 2023. We expect the median dot to rise 50bp to a new peak of 5-5.25%, in line with our own forecast for Fed policy next year …
… We do not see much that the FOMC can do to push back against the recent easing in financial conditions short of signaling another 50bp hike in February, and we think Fed officials will instead prefer to keep their options open for now. The recent easing might seem like less of a problem to the FOMC than it does to us because most other forecasters expect a recession next year, in part because they expect the impact of the rate hikes so far to be more lagged than we do.
Aside from the increase in the terminal rate, we do not expect major changes at the December meeting … The economic projections are likely to show a bit less growth next year, but a broadly similar outlook. And the dot plot is likely to show slightly larger cuts beyond 2023 from the new higher peak. Some commentators have suggested that the longer run or neutral rate dot might rise, but we suspect that the Fed leadership would rather avoid drawing attention to these estimates.
We continue to expect three 25bp hikes in 2023 to a peak of 5-5.25%, though the risks are tilted toward 50bp in February. We see Chair Powell’s recent focus on the decline in alternative measures of rent inflation as an important sign that Fed officials are comfortable looking ahead to an eventual deceleration and will not overreact to the lagged official data next year.
From the CHARTS department first up courtesy of Hedgopia,
Finally … while it is NO surprise, the NYG vs the Iggles went Purdy much as expected … And as the game of the week came and then went, it has become apparent GMM was spot on noting a new TB12 was born…HIS words, not mine
Oh. My. Gawd! This kid, Mr. Irrelevant, is Purdy good and is going to be something special! What a story.
Thank you!!!
Great insights! quality write up