… Clearly, sustained low inflation implies less uncertainty about the future, and lower risk premiums imply higher prices of stocks and other earning assets. We can see that in the inverse relationship exhibited by price/earnings ratios and the rate of inflation in the past. But how do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions as they have in Japan over the past decade?
HEREis a video clip of that and … In case you missed what is on Global Wall Street’s mind this past week and on into the week(s and year) AHEAD, HERE is the post sent Saturday afternoon with a link through to THIS PDF links thru to Global Wall Street sellside observations … there are (fwd entry long) bulls and (belly)bears, a couple charts as well as a pup pic…
… here is a snapshot OF USTs as of 718a:
… HEREis what another shop says be behind the price action overnight…
… WHILE YOU SLEPT Treasuries are lower (off their earlier lows) and the curve flatter (Tsy 2s10s hit a new move low of -81.4bp overnight) on China re-opening enthusiasm and despite a modest rally in Bunds and a decent bull-flattening in Gilts this morning. DXY is little changed while front WTI futures are higher (+2.5%) after OPEC+ kept production unchanged despite agreement over a Russian oil price cap Yahoo. Asian stocks were mostly higher (Hang Seng +4.5%), EU and UK share markets are mixed while ES futures are showing -0.35% here at 6:45am. Our overnight US rates flows saw better net buying (real$ in the long-end) during Asian hours but overall activity was deemed 'muted' by the desk. Overnight Treasury volume was ~90% of average overall with 3yrs (118%) seeing the highest relative average turnover overnight.
… we show Treasury 30yr yields in a weekly chart to highlight how ~3.50% may be a similarly-derived resistance for 30's- as it is for 10's at the same level. Note too that weekly momentum (lower panel) still solidly favors lower rates which is why we suggest above that an extension of the rally through year end may be likely. The price momentum winds are at the back of bonds, for sure.
Moreover, our next picture zooms out to the monthly chart of 30yrs to show (lower panel) how long-term momentum may be on the cusp of confirming a new, long-term bull signal at the end of this month. A December close near spot levels (and certainly lower) should do it. Also note how today's long-term momentum set-up and level matches up pretty nicely to same set-up for 30yrs at the turn of 2013-2014 and the end of the Taper Tantrum back then....
… and for some MORE of the news you can use » IGMs Press Picks for today (5 DEC) to help weed thru the noise (some of which can be found over here at Finviz).
Inflation continues to be at the center of client debates. The conversation has shifted from whether it has peaked to where it will settle. We have conviction on key subcomponent drivers of inflation and lean into our forecasts for the elements where we still await data to confirm our view.
… For the US, the three key components of core inflation are goods, housing (rent), and other services. We know that some categories of goods have prices that are already falling. As we have flagged in the past, our equities research colleagues have discussed the inventory correction that is under way. Automobile prices were key in the initial surge in inflation and remain the part of goods where prices remain the most elevated. Used car prices have now fallen for a couple of months. Empirical work that our team has done shows that typically, new car prices follow used car prices, albeit with something of a lag. Goods prices should provide notable disinflation pressure over the next couple of months…
Core goods inflation in the US should ease over coming months even as shelter inflation stays high
Three weeks ago I wrote that markets over-reacted to the downside surprise in the CPI inflation print. Over the last week, several pieces of news have added to my resolve that this was the case. First, there was the reaction to Fed Chair Powell’s speech, which led to a surge in risk assets even though he didn’t say anything obviously dovish, with the S&P 500 having its second-best day in the last two years. Second, the labour market data over the last week demonstrated that it remains incredibly tight by pre-pandemic standards, and is likely to add to inflationary pressures over the coming months. And third, futures are still pricing in a more dovish stance of policy relative to the Fed’s own stated intentions.
Given this, there’s the risk that we see a repeat of what’s occurred on numerous occasions this year, where unexpectedly bad news on inflation leads to a dramatic repricing of assets, as we saw take place in June and September following the release of the CPI reports.
Now with this in mind and having officially entered the unofficial ‘blackout’ period ahead of the next FOMC meeting, Wells Fargo offers a guide of sorts,
Inflation has shown some tentative signs of moderating, although it remains much too hot for Fed policymakers. Accordingly, we look for the FOMC to raise the target range for the fed funds rate by 50 bps at the December 14 FOMC meeting. We also expect the “dot plot” will indicate most Committee members believe that a restrictive setting on the fed funds rate will be appropriate through 2023…
For somewhat MORE on the Fed (as if anyone, anywhere hasn’t had their fill), an equity angle from folks at Barclays with a poignant reminder
Equities seem to be taking cues from 2019, when the Fed about-faced into a tight labor market and slowing growth environment. While the 2019 pivot framed one of the strongest rallies of the past decade, current conditions mean that both equities and the Fed are playing a very different ball game.
… Pivot like its 2019? We think the market has a short memory. The implied rate curve and equity factor leadership throughout the recent rally suggests that risk assets are taking cues from 2019, the last time the Fed pivoted into a tight labor market and a late cycle, slowing growth environment. We understand the hope, considering the 2019 pivot framed a ~40% rally for the S&P 500, but the macro and policy setup is much less favorable for equities today than it was back then.
Risk/reward remains unattractive, in our view…
For somewhat more on STOCKS, a weekly ‘warmup’ from the folks at MS
As suggested two weeks ago, for this tactical rally to go higher, back end rates would need to fall. Fast forward to today and that's what has happened. However, we are now right into our original upside targets and we recommend taking profits before the Bear returns in earnest.
… Below, we update the charts we showed in our last weekly warm-up which illustrate how stronger breadth argues for higher prices for the S&P 500 before this tactical rally is over. To get more precise, we like to look at the S&P as a percentage of its own 200- day moving average compared to the percentage of stocks above their 200-day (Exhibit 3). Using this simple relationship implies the S&P 500 should be trading approximately 7% above its 200-day moving average--which implies 4330 today.
However,given our sharply negative outlook for earnings next year even in the event we skirt an economic recession/labor cycle, the risk-reward of playing for this potential upside is poor. This is especially true when considering we are now right into the original resistance levels we projected when we made the tactical bullish call 6 weeks ago--i.e. 4000-4150.Furthermore, while the S&P 500 did break above the 200-day moving average last week, we view that as the perfect bull trap particularly given the overhead resistance from the downtrend established since the peak (Exhibit 4).Finally, looking again at Exhibit 3clearly shows that towards the end of the bull markets in 2019 and 2021, the price of the S&P never reached it's potential based on the breadth. We think it could be sending the same signal today.
Bottom line, the bear market rally we called for 6 weeks ago is running out of steam…
Speaking of VIEWS and bottom lines, HEREis Barclays Macro House View
Resilient US data on spending and payrolls highlight upside risks to rates
A number of signals last week (including softer inflation in the euro area) strengthened hopes that falls in price pressures can be achieved without a hard landing. However, resilient US data on spending and payrolls delivered a reality check, suggesting that tightening in monetary conditions has gained only modest traction to date. We still think the Fed will step down its hiking pace next week but note upside risks. Join us for a FOMC preview call on Thu 8 Dec.
In US rates, we recommend positioning fortail scenarios of 'higher for longer' and a deeper recession via being short the front end and forward-starting steepeners. In Europe, we are cautious on directional trades, preferring Bund ASW shorts alongside shorter-tenor peripheral wideners. In Japan, we continue to recommend longs around the 20y sector.
… Going back to July 2003, the correlation coefficient between Fed assets and the S&P 500 is a tight 0.91 (Chart 5). The large cap index tends to follow closely whether the Fed is adding or cutting assets. As things stand, this factor is a headwind.
