Good morning … ahead of JPOW 2.0 later on today (link thru to livestream should be HERE) followed by this afternoons 10yr auction …
Momentum cross (stochastics, bottom panel) suggests LOWER YIELDS but I’d suggest we can also work off oversold conditions with SIDEWAYS action and the longer we stay here in / around 4%, the more important this level becomes.
And while narratives ALWAYS follow PRICE, I could not help but pause and insert this exchange between Liz Warren and JPOW …
I’ll refrain from picking (JPOWs) side here and allow you to decide for yourself which has more credibility. Your choices are A, B or C (where C is neither)…
… here is a snapshot OF USTs as of 705a:
… HEREis what another shop says be behind the price action overnight…
… WHILE YOU SLEPT Treasuries are lower and the curve flatter out to 20's as Treasuries modestly underperform their Gilt and EGB market peers this morning. DXY is modestly higher (+0.1%) while front WTI futures are modestly lower (-0.25%). Asian stocks were mixed, EU and UK share markets are too while ES futures are modestly higher (+0.1%) here at 7am. Our overnight US rates flows saw a 3.7k block sale in TU's during Asian hours that kept the pressure on the front end where we saw real$ buying in the front-end against selling in intermediates from fast$. Overnight Treasury volume was solid at ~140% of average overall with the just-auctioned 3yrs (244%) seeing the highest relative average turnover overnight.
… Our first attachment shows the housing affordability index (ability of renters to qualify for a first-time home given financial conditions and 10% down) as of the end of last year (Dec 31st). We'd guess Q1 2023's update will show a fresh low in the time series, after yesterday. Powell will be pumped, if that proves true?
… and for some MORE of the news you can use » IGMs Press Picks for today (08 MAR— 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. Global Wall St SAYS:
First off something I stumbled across over the weekend and as it relates directly (ish) TO JPOWs testimony — POSITIONS, reported with a week lag, TWEETED
The latest CFTC data shows an even larger short position by levered/speculators/CTAs in 2Y notes despite yields reaching pre-GFC levels.
I THINK bond jockeys may have moved quickly from rate CUTS to pricing in whatever it was YESTERDAY will be deemed?
As you might imagine, there is more than plenty to say ‘bout JPOW. A few comments beginning with UBSs Paul Donovan
Federal Reserve Chair Powell’s cry of “hike, hike, hike” was evident in the Senate testimony yesterday. Powell stressed “data dependency” but not “understanding the data”. Profit-led inflation and seasonal adjustment distortions may slow disinflation early in the year, and accelerate disinflation later in the year. Despite some articulate questioning, Powell failed to elaborate how policy tightening will transmit to reversing profit-led inflation.
Powell testifies again today. We also get the Fed’s Beige Book of anecdotal evidence—the economic equivalent of the celebrity gossip magazines available at supermarket checkouts (when supermarket checkouts existed). Anecdotal evidence is unaffected by seasonal adjustment or fictional concepts like owners’ equivalent rent. It is affected by the media spin cycle and partisan bias….
… it was another landmark day in markets yesterday, especially for the yield curve, as the US front end hawkishness revved up yet another gear after Powell's first testimony of the week. US terminal has now gone past our street leading 5.6% forecast and closed at 5.624% (+14.8bps) last night (5.66% this morning). With US 2yr yields up +12.2bps and 10yr yields +0.06bp we saw a significant further inversion and the curve closed below -100bps (-104.9bps) for the first time since 1981. 2 and 10yr yields are up another +5.5bps and +3bps overnight with the curve breaking through -107bps.
Bear in mind that on all the previous occasions that the 2s10s has been more than -100bps inverted since data is available from the early 1940s (1969, 1979, 1980 and 1981) a recession has either been underway, or has occurred within a maximum of 8 months. To highlight the rarity of such an occurrence, there have only been 7-month end closes lower than -100bps in 80 years of available data. So we are in rarefied air.
In terms of the specifics of Powell's comments, the biggest takeaway was his openness to larger hikes again, saying that “we would be prepared to increase the pace of rate hikes” if the data indicated. And he also pointed to a higher terminal rate as well, saying that “the ultimate level of interest rates is likely to be higher than previously anticipated.”
Those remarks from Powell mark a significant pivot for the Fed. Last year they signalled and then delivered a slowdown in rate hikes, moving away from four consecutive 75bp moves to 50bps in December, and then 25bps at the last meeting. Up to that point, all the indications had been that they wanted to move cautiously and assess the cumulative impact of what they’d delivered so far. In essence, the signal was that any further hikes would be at a 25bps pace until they stopped. But yesterday’s testimony explicitly opened the door to a more hawkish reaction function, which throws open several tail outcomes that had previously been closed off…
Chair Powell’s testimony today sent a clear signal to the market that the Fed anticipates having to raise rates more aggressively over the coming meetings. At this point we have maintained our expectation for a 25bp rate hike at the March meeting and a 5.6% terminal rate reached in July. However, Powell clearly lowered the bar for a 50bp hike in March. As we noted in our monthly chartbook, we continue to see the risks to terminal as skewed to the upside (see Hiking until "sufficiently" satisfied).
In this short note we detail our top three takeaways from Chair Powell's press conference. We also discuss the Fed's potential reaction function to key data points over the next week…
The takeaways? 50bps rate hike door OPEN. Soft landing chances exiting (thru that door which was left open)? TERMINAL upside risks so DON’T be comfy with 5.5% as ‘sufficient’.
Seems this ‘view’ is not only one held by large German bank. Case in point, over to France, where the entire BBG econ dept has moved to,
US: Powell puts 50bp hikes back on the table, markets take note
Carl Riccadonna, Yelena Shulyatyeva, Andrew Schneider, Timothy High
KEY MESSAGES
Fed Chair Powell’s monetary policy testimony before the Senate Banking Committee took a hawkish tone. Policymakers are inclined to ‘do more’ via a higher-for-longer approach to the terminal fed funds trajectory.
Among the more notable takeaways was Powell’s re-opening of the prospect for a 50bp rate hike as soon as the March FOMC meeting.
US rates responded decisively, pushing the 2y UST yield to 5% and 2s10s UST through -100bp. We continue to believe much deeper inversion is possible and continue to hold our 1y2y ATMF+25bp payer entered on 10 February.
And what would any sort of Fed day be without an updated view from Goldilocks
BOTTOM LINE: In his prepared remarks before the Senate Banking Committee, Fed Chair Powell noted that the terminal fed funds rate “is likely to be higher than previously anticipated” in light of the recent growth and inflation data and that the FOMC would be “prepared to increase the pace of rate hikes” if the data suggest a faster pace is warranted. We expect the data ahead of the March meeting to be mixed but firm on net, and we therefore see our standing forecast of a 25bp hike in March as a close call, with some risk that the FOMC could hike by 50bp instead. Whether the FOMC hikes by 25bp or 50bp, we expect that the median dot will rise by 50bp at the March meeting to show a peak rate of 5.5-5.75% in 2023. We have raised our own forecast of the peak rate by 25bp to 5.5-5.75% as well.
Although the March FOMC decision remains data dependent, Chair Powell's Senate testimony increases the likelihood that the committee will hike 50bp in March and signal a higher peak. Specifically, we think the bar for such a move is significantly lower, with an NFP gain of more than 200k/m a highly plausible trigger.
In today's Senate testimony, Chair Powell stated that, "If the totality of the data were to indicate that faster tightening is warranted, we would be prepared to increase the pace of rate hikes."
We think this significantly boosts the likelihood of a 50bp hike at the upcoming March meeting, which would likely be accompanied by a median 2023 dot exceeding our current 5.4% expectation.
In our view, if Friday's employment report shows a gain in NFP that exceeds consensus expectations (+200k), it would be sufficient for a 50bp hike, as well as an increase in the median 2023 dot to 5.6%.
OK, alright ENOUGH … if you want / NEED more well, you’ve got issues (which is why I like you! :))
… Federal Reserve Chair Jerome Powell managed to sound even more hawkish than markets had feared, setting up the potential for a half-point interest-rate hike this month. While the dollar surged and stocks tanked, the Treasuries market was more nuanced in its reading of the implications. Short-end government yields soared to take into account the shift in the rates outlook, but longer-dated securities were in much better shape as investors priced in expectations for slower economic growth.
The 10-year closed flat on the day to send its discount to two-year yields past 100 basis points for the first time since 1981. Should Powell & Co. deliver an outsized policy move, and/or jack up the forecast path via the dot plot, there’s plenty of scope for that gap to widen as they push short-end yields higher. That curve inversion could get significantly deeper as a result because the market is plainly convinced that 4% is about as high as 10-year yields can go, so investors are ready to pile in every time they hit that mark. Which tells us that bond managers are also increasingly concerned that the higher the Fed goes the faster the economy will fall down.
On the curve, Bespoke
… Speaking of yields, the 2-year vs. 10-year Treasury yield curve is now inverted by more than 100 basis points, which is the steepest inversion since 1981. We're sure you already know that yield curve inversions are correlated with recessions, but below is a reminder if you need it (grey shaded areas represent US recessions).
Now, speaking of 10yy, BCA has THIS to say,
Good morning Steve, Recent data have not changed our view that core inflation will fall to at least 3.5% by the end of this year. However, there is now a meaningful risk that our anticipated disinflation will not come through until H2 2023. To hedge against this risk, what might US bond investors do?
In the BCA Research report, A Fair Value for Bond Yields When The Fed Is on Hold, US Bond Strategist Ryan Swift discusses the risk of no landing, TIPS as a cheap hedge, and he defines the fair value for the 10-year Treasury yield.
The 10-year Treasury yield briefly jumped above 4% last week before reversing course. We view a move back above 4% as quite likely during the next couple of months and we’re hoping to take advantage of those yield levels by extending portfolio duration.
In prior research we noted that, on average, the 10-year Treasury yield tends to peak 1-2 months before the last rate hike of a tightening cycle. With the last rate hike likely coming early this summer, it’s reasonable to anticipate one more bout of bond weakness.
More recently, we showed results from a simple fair value model for the 10-year Treasury yield based on the fed funds rate, inflation expectations and potential GDP growth (Chart 1). Using this model, a peak fed funds rate of 5.25% implies a fair value 10-year Treasury yield of 3.98%. A peak fed funds rate of 6% implies a fair value 10-year Treasury yield of 4.22%.
In light of this analysis, we are inclined to view any 10-year Treasury yield above 4% as a buying opportunity. Stay tuned…
Finally a couple links for those visual learners attempting to see where / how next narrative is formed (as we know it follows PRICE).
AllStarCharts: A Raging Dollar Revives Last Year’s Challenges
… Check out the overlay chart of the US dollar index $DXY and the US 10-year yield $TNX with a rolling 126-day correlation in the lower pane:
Notice the consistent positive correlation between the US benchmark rate and the dollar since fall 2021. It all began as Federal Reserve officials swept aside inflation, calling it “transitory.”
* Following Powell’s hawkish testimony, we have seen a very strong reaction in FX markets in particular, with a number of key crosses falling sharply to key technical inflection points. Powell made a reacceleration in the pace of hikes contingent on the data, making this week’s weekly close even more important than usual from a technical perspective, with the NFP data coming on Friday. High-beta FX (GBP, AUD, CAD) look most vulnerable to a strong print…
On that / those notes, I’ll quit while I’m behind as JPOW heads back up to The Hill as other legislation makes its way ‘round the place,
Top notch note