(USTs lower / flatter following Germany today on what seems to be strong volumes)while WE slept; "Global Bonds Erase Record Opening Rally as Inflation Lingers"
Good morning … in today’s edition of meet the new boss, same as the old boss,
BOJ Governor nominee Kazuo Ueda said “I think it’s appropriate for monetary easing to be continued”.
For NOW, though, impacts are hardly helping. Evidence US2yy
… nearing late OCT / early NOV ‘cheaps … and SO, here is a snapshot OF USTs as of 705a:
… HERE is what another shop says be behind the price action overnight…
… WHILE YOU SLEPT
Treasuries are modestly lower and the curve mostly flatter after German 10yr yields hit a high last seen in 2011 earlier this morning (BBG). On Bloomberg, the UK 2s10s curve is showing 49bp! steeper this morning and we suspect Gilt rolls are behind that. DXY is modestly lower (-0.13%) while front WTI futures are too (-0.45%). Asian stocks were mixed and mostly little-changed, EU and UK share markets are mostly solidly higher (SX5E +1.85%, DAX 1.5%) while ES futures are showing +0.45% here at 6:55am. Our overnight US rates flows saw better real$ selling in the long-end and intermediates during Asian hours. Nothing from London this early but overnight Treasury volume was solid at ~145% of average overall with 2yrs (304%) seeing really high average turnover this morning according to our volume sheet...… Our next attachment zooms out to the monthly chart of 2yrs to highlight the spike high in 2yrs from January 2007 at 4.99% (green line drawn in). So that's one possibility. Then behind that appears to be more solid support near 5 1/8% which is derived by 2007's move high and 2006's peak monthly closing levels near there. We have low confidence on these supports because it might be a stretch to assume a 'barrier of demand' 16 years ago might persist today.
… and for some MORE of the news you can use » IGMs Press Picks for today (27 FEB— and STILL SPORTING THAT NEW LOOK!!) to help weed thru the noise (some of which can be found over here at Finviz).
From some of the news to some VIEWS you might be able to use. First, HERE is what Global Wall St SAID over the weekend … where I also noted a person under consideration for VC spot at the Fed noted how / why EVERY time is different … Said person’s latest offers MOAR details,
Weekly Worldview: How is this time different?
Cycles are always different, but the key question is how much. This cycle is an outlier since the 1970s in many aspects, including persistent inflationary pressures, resilient labor markets, and the monetary policy response.
I get it. It is ALWAYS ‘different this time’ ACADEMICALLY SPEAKING but in as far as how then those up IN their ivory towers decide to pull levers and, well, MANAGE the economy for the rest of us, well, it ultimately is NEVER different this time — at least not those on the front lines trading their own P&L or managing assets as their fiduciary responsibilities …
Now on to this mornings VIEWS where I begin with very first thing greeting ME today is from a large British bank — writing what everyone is now thinking in the wake of data so far,
Macro House View Weekly: Back to 50?
A strong rebound in activity and firm inflation suggest that the Fed may step up the pace of tightening once more in March… In US rates we recommend 2s5s curve flatteners as the front end is vulnerable to the risk of a more restrictive policy stance. In Europe, we recommend receiving August ECB-dated ESTR, as we see room for an undershoot of current pricing. In the UK, solid PMIs and a hawkish speech from MPC member Mann have added uncertainty to the near-term policy path.
From the UK to Germany where everyone is apparently thinking about the same thing and approach may be a touch different. Here’s a subtle, I TOLD YA SO,
… On Friday, US terminal closed at 5.4%, catching up to DB's street leading 5.6% forecast. Clearly this has been bubbling up since payrolls (Feb 3), the CPI revisions (Feb 10), CPI beat (Feb 14), retail sales beat (Feb 15), and even things like Manheim used prices spiking higher again in January and February. Last Friday's core PCE was another important piece of evidence with the 0.6% mom print above expectations of 0.4%. Even though the concern was that it would beat, this added fuel to the fire and markets still struggled to deal with the ramifications with 2yr, 10yr and terminal up +11.6bps, +6.8bps and +5.3bps to 4.814%, 3.943% and 5.40% respectively. 2yr yields are the highest since July 2007 and terminal the highest this cycle.
For core US PCE, the 3m, 6m and 12m annualised numbers are now 4.8%, 5.1% and 4.7% and thus strongly hint at inflation stickiness. With this data it’s tough to rule out a return to 50bps hikes even if that’s not yet the base case. While that uncertainty is there, markets will stay on edge.
Whats this all mean? Well, for one thing, Bloomberg highlights “Global Bonds Erase Record Opening Rally as Inflation Lingers”
… A hot reading for the Federal Reserve’s favored inflation reading was enough to send global bonds into the red for this year. January’s 3.3% surge, the index’s best first month on record, has been more than erased in February as traders struggle to keep up with where the US central bank’s peak cash rate will be.
That opening rally came as swaps traders priced for the Fed to halt hikes at under 5%, and trim by 50 basis points by January 2024. A barrage of hawkish rhetoric and some robust data has the market anticipating a 5.4% terminal rate with no cuts this year. The market does still anticipate easings next year, which signals more pain could come for bonds should the central bank hold firm. Then again, another period when rate expectations cool down could also bring a fresh rally, given yields are high enough to still spur healthy demand at some auctions.
Finally, on stocks — something everyone will certainly be ‘talkin about ‘round the virtual water cooler’ — from the ‘it IS different this time’ shop,
Testing Critical Levels
With the equity market showing signs of exhaustion after the last Fed meeting, the S&P 500 is at critical technical support. Given our view on earnings, March is a high risk month for the bear market to resume. On the positive side, the US dollar could allow equities to make one more stand.…Exhibit 1: Earnings Declines Define Bear Markets. Has EPS Troughed?
… During such periods, there is usually a vigorous debate (like today) as to when the NTM EPS will trough. This uncertainty creates the very choppy price action we witness during bear markets. We have made our view crystal clear, but that doesn't mean it is right, and many disagree. That is what makes a market. Furthermore, while it's hard to see in Exhibit 1, the NTM EPS number has started to flatten out recently but we would caution that this is what typically happens during these EPS declines: the stocks fall in the last month of the calendar quarter as they discount upcoming results and then rally when the forward estimates actually come down (Exhibit 2).
Exhibit 2: Pattern of Last Year Suggests March Is High Risk for Stocks to Discount Next Round of Cuts
AND for somewhat MORE on stocks, back to that rather large British operation,
Deconstructing the Valuation Overhang
Equities have rolled off the YTD peak, but so have earnings estimates, leading us to revisit valuations. P/E is still too high relative to rates, inflation and underlying economic growth, and the distribution of multiples within the S&P 500 indicates that this remains a broad-based and systemic issue.… The valuation overhang remains a broad-based and systemic issue, based on the concentration of EPS revisions to date, our analysis of the historical relationship between SPX and SPW P/E, and the distribution of multiples within the S&P 500. On a sector basis, valuations for Consumer Discretionary and Industrials look the most elevated.
AND from stocks back TO the economy … and specifically the week (month) ahead,
Yardeni: The Economic Week Ahead, Feb. 27 - Mar. 3
AND … THAT is all for now. Off to the day job…