Good morning … with NAZ up about 15% YTD (but down about same over past 1yr),
Interesting — or perhaps NOT and completely UNRELATED that 2yy are about UNCH on the year so far,
(note to self — daily momentum overSOLD about to cross BULLISHLY) and while this selloff in BONDS maybe not pleasant, it certainly is a welcomed reprieve ahead of / into duration supply in the days just ahead. Be that as it may, here is a snapshot OF USTs as of 705a:
… HEREis what this shop says be behind the price action overnight…
… WHILE YOU SLEPT Treasuries are lower and the curve flatter beyond 5yrs after Friday's shock NFP print and amid further hawkish rhetoric from the ECB (Kazaks, Holzmann, Vasle) and the BOE (Mann) this morning and earlier. DXY is higher (+0.45%) while front WTI futures are little changed (+0.35%). Asian stocks were mixed (China names lower, Japan names higher), Eu and Uk share markets are all in the red (SX5E -1.4%) while ES futures are showing -0.8% here at 6:55am. Our overnight US rates flows saw a high(er) volume trade during Asian hours as the front end yields led higher. Our desk activity there saw better selling across the curve, on balance. Treasuries opened with a bid in London hours (central bank buying in the front end, EU asset managers paring shorts) before fast$ selling in the belly and flattening of curves emerged. Overnight Treasury volume spiked significantly to ~250% of average with 2's (431%) and 5's (339%) seeing relatively high, standout activity this morning.
… Our following attachment shows 2yr Treasuries doing the very same thing this morning where closes today above 3.705% in 1y1y rate and above 4.35% in 2's would confirm the bearish breakouts while confirming that the multi-month rallies that preceded the breakouts were corrective rather than trend-starting. Such breakouts would indeed raise the risks of positioning-refreshed legs higher in yields that should, if the textbooks on continuation patterns and Bear Flags are right, spark returns in each benchmark at least to their November move highs in yields. Indeed, a classic measured move in 2yr yields that takes the length of the August 2nd to November 4th 2020 'flag pole' or sell-off and adds it to the recent corrective move low near 4.03%... yields a longer-term, measured move target of ~6.02% in 2yr notes. Needless to say, the landscape shifted Friday and closing breakouts today like those described above would have seriously negative ramifications for duration in our view.
… and for some MORE of the news you can use » IGMs Press Picks for today (6 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 (here are some WEEKLY, largely NFP dominated sellside observations) … And here are a few items which Global Wall St may very well be discussing … First up is something written / offered end of JAN (31st),
Project Syndicate: Kenneth Rogoff: Too Soon for Global Optimism It is hard to reconcile the jubilant mood of many business leaders with the uncertainty caused by the war in Ukraine. While there are some positive signs of economic recovery, a sudden escalation could severely destabilize the global economy, cause a stock market crash, and accelerate deglobalization.
This was written BEFORE Friday’s NFP so I’ll keep better eye out for any sort of rumblings and updates from Ken to see IF the data moved HIS needle at all. And speaking of needling being moved by NFP, Jim (early morning)REID,
…Given the blockbuster payrolls print, Fed Chair Powell's speech at the Economic Club of Washington tomorrow could be the highlight. The release valve post the blackout period will mean we have a mini deluge of other Fed speakers too including Vice Chair of Supervision Barr (tomorrow), New York Fed President Williams, Fed Governor Cook, Minneapolis President Kashkari and Fed Governor Waller (all Wednesday). Their comments on the payroll report will be devoured and it'll be interesting if they, and especially Powell, decide to slightly firm up the hawkish spin and be more explicit on a terminal rate above 5%. We continue to think we'll get that, but the market has been increasingly pricing a pause after March and cuts by year-end. To be fair, Friday saw terminal edge back above 5% (climbing +12.5bps to 5.025% on the day) with December 2023 contracts up +23bps to 4.58%. This week's Fedspeak on financial conditions will also be interesting as the relaxed attitude of Powell to them at the FOMC presser encouraged a big dovish market reaction. Much of this was reversed on Friday but the sensitivities to such comments remain high. There's plenty of other central bank speak this week. See it in the day-by-day calendar at the end…
… 1. The Fed have never tightened this much and this fast (over 400bps in a year) without a recession occurring within months.
… 2. The Conference Board’s Leading Index of economic indicators has never fallen by this much in a year without a recession occurring…
… 3. Since its peak 10 months ago, the number of jobs in the “Temporary Help Services” category has fallen by -3.1%. This indicator tends to lead the cycle, and in available data going back to the early-1990s, we’re yet to see a decline this rapid over 10 months without a recession shortly following.
… 4. The 2s10s curve has inverted prior to all of the last 10 US recessions, and is now more deeply inverted than at any time since the 1980s. The inversion hasn't fallen beneath -60bps in available data without a recession occurring within the next 14 months, and that threshold was crossed in November.
5. Similarly, a curve cited by Fed research (18m forward 3m rate minus spot 3m rate) as a better recession predictor has inverted by more than 100bps. There is only one other time in available data where it’s done so, and a recession followed within months.
6. The ISM Manufacturing new orders subcomponent has now fallen to levels historically consistent with recessions (or an imminent recession). The last time it was this low and a recession didn’t follow within a year was back in 1952…
All these indicators aside, seems to be one general conclusion offered by a graph,
… As the graph below shows, the S&P 500 has historically bottomed in each cycle only once the recession has actually begun, or sometimes afterwards as in 2002. That fits into our equity strategists' view, who see the bottom for the S&P 500 at 3250 in Q3 as the US recession begins, before a subsequent recovery.
Stocks for the long run.
I’ll continue moving right along to something more current, MS stratEgerists asking very good question,
Which Story to Believe?
After a terrible year where nearly everything fell, 2023 has seen (almost) everything gain. Across assets, it’s been one of the strongest starts to a year in recent memory.
But behind this broad-based strength, we find three distinct stories across Asia, Europe and the US. The story in Asia looks most compelling, the US story most uncertain.
The first story is China’s reopening: Until recently, the world's second-largest economy was following a different Covid strategy than almost every other country in the world. That policy is now shifting, with surprising aggressiveness, driving large upward revisions to our estimates for China GDP, Asian equity earnings, and regional price targets.
A counterpoint to this optimism is that this story is now well known (hedge fund exposure to China stocks has already jumped). But we think that this stance risks missing the forest for the trees. We’re seeing a major policy shift in a very large economy, impacting markets that trade at reasonable valuations. MSCI Asia may be up 25% from the lows but is largely unchanged from five years ago. China, Korea and Taiwan remain top regional picks within global equities.
The second story is about Europe, and the dramatic fall in its energy prices: A warm winter and sizeable US imports have raised the once unimaginable prospect that Europe may have to deal with too much natural gas relative to what storage can hold. As a result, the price of natural gas is down by more than 80% since late August, driving our forward-looking forecasts lower.
This decline is important. Lower energy prices mean less inflation and better growth, where previously high energy prices had meant high inflation and weaker growth. It also makes Europe ‘investable’ for corporates and investors who previously worried about an energy crisis, and regional inflows have surged. Note that this is also distinct from our first story. While China’s reopening helps Europe, equities there bottomed a full month before those in China. Energy has been the bigger driver…
…It might be about a 'soft landing' and the idea that US growth will slow enough to moderate inflation and reverse rate hikes, but not enough to drive the economy into recession. That’s one way to explain higher equities, lower yields, tighter spreads, and expectations that the fed funds rate is 150bp+ lower by end-2024.
A soft landing has been our US economics team's base case and a key part of our year-ahead outlook. But the incoming data remain mixed, with moderating wage growth and a very strong payroll report, alongside weak readings for US ISM and the Index of Leading Economic Indicators. The debate around growth seems alive and well…
…2023 so far has seen a broad-based rally driven by distinctly different stories. We feel most confident that this story can continue in Asia, least confident about the US, and would put Europe in between. We like selling upside in US stocks to buy upside in global markets, positioning for a so far universal rally to become more dispersed.
AND turning attention across the pond TO a large British operation,
Macro House View Weekly: Not so fast A surprisingly strong US jobs report was a reminder that the inflation fight may not be over
…We expect US yields to be higher, in view of a more data-dependent Fed, and maintain our recommendation to be short the front end. In Europe we do not see attractive risk/reward in fading moves lower in yields so keep longs in EUR 2s5s30s, as well as Bund ASW shorts. In the UK we recommend May/Aug OIS flatteners to position for increasing pressure on the BoE to ease…
… A spate of cold snaps is posing problems for utilities. Winters are growing warmer, overall, but sudden blasts of extremely cold weather are becoming more frequent, and more intense. But it is not clear that utilities’ balance sheets have adjusted to heightened risks of disruptions and penalties for non-performance. Srinjoy Banerjee and colleagues flagged the downsides for bondholders. Power & Utilities: Extreme Weather: Living With Volatile Winters, 1 Feb 2023
…It's happy days in stock markets. Central banks' failure to push back against dovish market expectations has turbocharged the "Goldilocks" mood in Europe, despite uninspiring Q4 earnings. Many investors remain under-exposed to equities, noted Emmanuel Cau and team. This may now change, with market momentum firmly positive. US equities are trading too rich for most outcomes, said Venu Krishna and colleagues. European Equity Strategy: Equity Market Review - Goldilocks mood turbocharged, 3 Feb 2023; US Equity and Rates Strategy: The Price Isn't Right, 6 Feb 2023
Happy days in stocks in mind, from MSs stock jockey in chief,
Dissecting the Cross Currents With so many cross currents in markets, discerning the true message is more challenging than normal. While we didn't get the definitive reversal last week for equities we were expecting, the door is still very much open for our call to play out; though it could develop at a bit slower pace.
… the more cyclical Dow Industrials was down 0.2% on the week. In fact, it's underperformed the S&P 500 this year by 5.4%. Given that the Dow was the leadership index off the October lows and representative of the China reopening narrative to many, this more recentunderperformance suggests to us that market internals are now less supportive of a cyclical rebound. We note that both the Dow and the S&P are now trading back into resistance (Exhibit 1 and Exhibit 2).
…the positive price action is forcing many to question and even abandon their fundamental conclusions that prices are too high given the likelihood of lower earnings and already stretched valuations. Exhibit 7 helps to show that institutional investors are chasing even more aggressively than they did in the prior two bear market rallies last year.
… While some of this upside surprise can be attributed to the seasonal and longer term adjustments to these data, it's hard to argue the labor data isn't strong, which means there really is no reason for equity investors to get excited about a cut in rates and/or further relief from the back end of the Treasury market. To that end, specifically, our rates strategists reversed their bullish position on duration Friday post the jobs report. Second, with respect to liquidity, the gap continues to widen between the aggregate measure shown below in Exhibit 9 and equity index price…
Bottom line, while last week's events did not lead to an immediate reversal in this latest bear market rally, we also don't think they offered any conclusive evidence to suggest a new bull market began in October. In fact, we find many are using price action to make erroneous conclusions about Fed policy and the magnitude of the ongoing earnings recession. While it may take a bit longer for the market to price our view, we don't think the conclusion will be any different than we have been thinking. In addition to forward EPS growth which just turned negative on Friday, watch the dollar and rates as key variables to determine how long equity markets can hold up.
While MARKETS are never wrong, those folks cooking up economic forecasts are equally as funTERtaining and so, from the same shop as the aformentioned Mike Wilson, comes the latest global briefing asking like all of our kids on a long road trip,
Are We There Yet? The Fed, the ECB, and BoE raised rates last week. How close are we to the end of the hiking cycle? Last week should have made it clear that we are not there yet.
… The short answer is “no, we are not there yet.” And I have personally regretted saying to my kids “not long now,” only to get stuck in traffic. The nonfarm payrolls print could be that kind of traffic for the Fed. And for markets that are looking beyond the peak to the first rate cut, the most recent message from the data and from central bankers is “you will just have to be patient, I’m afraid.”
For MORE on stocks with a rates overlay — THIS from a large British operation,
U.S. Equity & Rates Strategy: The Price Isn't Right Rates markets continue to disagree with the Fed's policy rate outlook, reflecting lower growth and inflation expectations. Within risk assets, our analysis of equity risk premiums and credit spreads indicates that stocks remain particularly mispriced relative to current levels of inflation and growth.
AND … I’ll quit while I’m behind but before I go, a look at THE balloon before being shot down — from the NJ point of view,
