(USTs lower / flatter with 130% avg volumes on heels of strong UK 'flation print)while WE slept; BULLard; trading the PEAK; IS 'Merica already IN recession (quick, someone check the canary)
Good morning … NFLX beats (but guides lower), TSLA CUTS (prices 6th time this year so … disinflation?) and BAML customers spending binge (+8% vs this time last year) and so … stocks are down and bond yields are UP … 10yy are approaching their 40dMA (relevance YESTERDAY and bit more below),
AND with that approach OF 40dMA, momentum looking a bit more overSOLD today than in days past and, dare I say, on verge of rolling over / crossing (bullishly) … and so, here is a snapshot OF USTs as of 705a:
… HERE is what this shop says be behind the price action overnight…
… WHILE YOU SLEPT
Treasuries are lower and the curve flatter (especially beyond 10's) as UK Gilts lead the sell-off after CPI inflation printed above 10% again there (highest in G-7). DXY is higher (+0.3%) while front WTI futures (-2%) back further lower after their failed bullish breakout last week. Asian stocks were mostly lower, EU and UK share markets are all modestly lower (FTSE 100 -0.4%) while ES futures are showing -0.5% here at 6:55am. Our overnight US rates flows saw yet another muted Asian session with volumes there concentrated in intermediates. In London hours, rates have ground higher with steady buying in the front end from central banks and systematic accounts noted. Intermediates later saw buying too but swaps paying has been a roughly full offset this morning, giving spreads a modest lift. Overnight Treasury volume was decent at ~130% of average overall with 5yrs (165%) and 10's (158%) seeing the highest relative average turnover overnight.… For us, a 'short term' chart is a daily chart where momentum signals tend to guide for moves, say, 1-week to 1 month ahead. All of this morning's attachments are daily charts, save for the last one. We'll start with the daily chart of 2yr yields showing this morning's attempted breakout above support near 4.25%- a support derived by the twin daily peaks in 2yrs rates seen around mid-March; untouched since then or until this morning after the UK CPI consensus beat. We'll see if 2's close today >4.25% (4.254% the precise level), confirming the bearish breakout. We've got next support at ~4.40% (drawn in) and not much but 'air' above that level. Do note in the lower panel that daily momentum has begun to inch into 'oversold' readings. Such readings could persist (see February) but our radar's on for a bullish momentum flip at any time now.
… and for some MORE of the news you can use » IGMs Press Picks for today (19 APR) to help weed thru the noise (some of which can be found over here at Finviz).
Before we begin, BULLtard yesterday morning, setting the tone a short while after I hit send …
Exclusive: Fed's Bullard discounts recession talk, favors more rate hikes
… "If you were really going to get a major financial crisis out of this, that index would spike up to a four or five. It's zero now. So it doesn't look, as of this moment, like too much is happening," Bullard said.
From some of the news to some of THE VIEWS you might be able to use… here’s what Global Wall St is sayin’ …
Yesterday morning I noted the best in the rate stratEgery business threw down a line in the sand and I think it’s worth noting,
BMO Morning: Tactically Minded:
…In outright terms, 10-year yields moved above the 3.50% level; although the magnetism of this point remains difficult to dispute. Stochastics continue to favor higher yields and we’re viewing any move beyond the 3.65% 40-day moving-average as a buying opportunity.
Did you hear that? Was it opportunity knocking? May very well be and so, we’ll moving along for now … HERE is a large German operation detailing,
The unstrange story of the front end: From extreme to mainstream
In terms of reshaping of the yield curve, the second week of March represents a turning point in the market’s perception of monetary policy and a structural shift in repricing of economic uncertainties. In terms of its intensity and magnitude, and unorthodoxy, repricing during those ten days dwarfs anything we saw in the recent (and not so recent) past. The move was led by a 100bp rally in the RED contracts (1Y1Y) which exacerbated an already extreme inversion in this sector, while the longer forwards bull steepened. As a result, the FRONTs/REDs spread flattened (inverted) by 30bp, while 2s/10s steepened by 70bp. Compared to what happened in the second week of March, there has been much less change in subsequent four weeks.
To put things in perspective, we display the FRONTs/REDs spread over the past 23 years, overlaid with the Fed funds (Figure). We note that the current inversion is unprecedented. When seen through this spread, the current cycle remains consistent in one thing only, the absence of consensus between the Fed and the markets. As the first rate hikes were administered in 2022, the shape of the Eurodollar curve (extreme steepness of the very front end) reflected a strong belief in transient nature of inflation with REDs front running the near-term hikes. (The chart also illustrates the oddity of that particular moment: Such a steep money market curve occurs normally only during the easing cycle.) This proved quickly to be incorrect, and the front end began its upward trajectory driven by the underlying intensity of delivered hikes while longer forwards remain skeptical and positioned as if a reversal of monetary policy was around the corner. As a consequence, FRONTs/REDs spread continued its steady compression which got a new leg in the second week of March.
These changes are not only visible in the money market slope but are a result of an unprecedented dislocations of the entire Eurodollar sector of the curve …
All cleared up as to what this means and what next?
Good. Me either…lets continue and plow ahead.
TO … another report from a different and more of a fan fav stratEgerist from same rather large German bank offering a guide,
It remains common to think of the next Fed meeting in May as the last rate hike in the tightening cycle, and this has spawned a growing interest in how currencies and asset markets have traded in the past in the aftermath of the ultimate rate hike in a cycle. Table 2 and all the line charts that follow show what happened to asset prices as far out as two years after the funds rate peaked. Among the lessons are:
… iii) There is a strong pattern for equity strength in the year- and two-year periods following a peak in the funds rate. Knowledge of this could itself create some proclivity toward near-term equity resilience, even independent of the deterioration in earnings.
iv) Equities have historically been a much better investment after peak fed funds than commodities or credit.
… vi) In keeping with a pattern where most asset markets respond positively to a peak in the Fed cycle, bond yields at both the back end and even more so the front end tend to move sharply over different times slices from one month to two years.
vii) Even as the curve steepens, bond duration is a buy, in our view. In contrast credit spreads do not show much propensity or capacity to narrow on the back of Fed action, which highlights the extent to which credit lags the business and the Fed cycles…
From trading the ‘peak’ to slowing down and INVESCO asking,
Will Fed hawks go too far in their inflation fight?
Kristina HooperInflation is cooling
It's clear that the US economy is cooling, and so is inflation, but we don’t know the full impact of the Federal Reserve’s aggressive tightening.A global view
The Fed isn’t the only central bank taking a hawkish tone, as recent comments from the European Central Bank and Bank of England illustrate.A growing risk
I believe that central banks that continue to tighten in this environment pose a risk to their respective economies.
Part of what Global Wall Street is saying and think comes from the Terminal and so to does this one, via ZH,
"You Can't Fight The Curve": Rates Curve Is Saying There's Little Upside To Another Fed Hike
By Simon White, Bloomberg markets live reporter and analyst
The market is anticipating one more hike from the Fed, but the short-term interest rates curve intimates there are rapidly diminishing benefits to higher rates, while their adverse costs continue to rise.
Barring the unexpected, it looks as if the Fed will raise rates 25 bps at its May meeting. However, the battle the Fed has fought with the curve has reached the point where raising rates again will have a negligible additional impact on quelling inflation, while the costs could still have an undesired negative impact.
The fed funds curve is now almost completely negatively inverted. What this means is that one more hike will be minimally transmitted along the curve out to longer maturities where it would be able have a greater impact on constraining inflation.
Indeed, this is the first time that the very front of the fed funds curve has been inverted in the run up to the last hike. Thus each previous tightening cycle the Fed’s last hike has had more ex ante demonstrable benefits.
Given the shape of the curve, and the stubbornness of the pricing in of a “Fed pivot,” another hike would raise only the spot rate. The size of the pivot would probably deepen as the market assumed that the economic harm from higher rates would need to be addressed by greater cuts. Of course, if the Fed communicated the hiking cycle had a lot more to go, the curve would capitulate, but this is highly unlikely given we are teetering on the edge of a recession.
This has been the story all cycle. The Fed’s hawkishness was met by a higher expected peak rate, but that peak was brought forward, and the subsequent pivot made deeper. The market signally ignored the Fed’s evangelism for “higher for longer.”
Raising rates will increase the amount the Fed pays on reserve balances and on the RRP. This is great for larger banks who have a surfeit of reserves; it’s also good for money market funds and their clients (ZH: this is precisely what we have been warning about since last July).
But it means more stress for smaller banks who are not flush with reserves, some of which are still paying through the Fed’s target range for them. It will also at the margin further stress the hold-to-maturity portfolios of many, again smaller, banks. Moreover, it keeps pressure on rising interest-rate costs for the government.
Overall, if the next Fed hike was a trade for the central bank, it looks like one with poor risk-reward.
And for somewhat MORE — possibly MORE important — from same (Simon White, BBG via ZH,
It's Time To 'Proof' Portfolios From Looming Recession
… Specifically, portfolios with the following traits will be better placed to weather the coming economic turbulence and concomitant elevated inflation:
Low exposure to currently more overbought sectors such as tech and semis
Increased exposure to currently lagging, lower-duration sectors such as energy, utilities and pharmaceuticals
Limited in longer-duration fixed-income exposure, i.e. have lower exposure to longer-maturity bonds
Low exposure to credit, the asset class most mis-pricing recession risk
An increased allocation to commodities, precious metals and other real assets
Overall, structured to benefit from higher volatility
In this recession, the usual playbook of buying bonds and rotating into more defensive equity-sectors is likely to be far from optimal. With the specter of inflation hovering in the background – and liable to start rising again later in the year – duration risk is a key consideration.
In a zero interest-rate, forward-guidance world, longer-term debt all the way down to cash looks more fungible, while growth stocks tend to have a material advantage over value stocks given low borrowing costs and the ability of larger companies to term out debt for longer.
But when inflation is high as it is today, growth stocks lose their comparative advantage. There are many exceptions - some growth stocks will have strong pricing power that will outweigh the downsides of having lumpy cash-flows expected far in the future - but an overarching rule of thumb is that portfolios with lower duration risk will be better placed to withstand an inflationary recession.
Similarly, bonds may not fulfill their traditional role as a recession hedge or safe haven to the same extent. Reducing fixed-income duration as much as feasibly possible is prudent when rates have more upside potential than they have had for decades. Bonds are pricing in a recession, but a garden-variety one where inflation falls and remains contained.
But even more egregiously mis-priced is credit….
WHY might one want to hedge ‘looming recession’ when we might already be IN it ?? Asked another way, what if it’s too late? NEVER too late BUT, also from BBG, Ed Harrison asks / offers,
Is America already in recession?
Are we in a recession right now? Sure, the Atlanta Fed’s GDPNow figure suggests the economy grew by 2.5% last quarter. But such numbers get revised and much of that strength was in the earlier part of the quarter. I worry about numbers for March because of what they say about the economy, and because a credit crunch is likely brewing. That mix signals we have to be on alert for a recession, which means lower earnings and lower stock prices…
… Canaries are dying
… Back in June 2022, I looked at the Federal Reserve Chair Jay Powell’s preferred recession indicator: the spread between three-month Treasuries and the anticipated three-month rate in 18 months. The spread level, which Powell touted in a post-rate decision press conference, was so high, it was nearly two percentage points above a recession signal — and it made any notion of an economic contraction seem impossible. Now, it’s so deeply negative, a recession seems all but inevitable.I also looked at the difference between yields on two- and five-year Treasuries last year, when it was a good 20 basis away from critical levels. Since then, it has inverted by a half percentage point.
While such signals weren’t sounding alarms last year, they all are now. In other words, the canaries in the coal mine are dying and it’s time to make a move because a recession is a matter of when, not if…
… Cash, shorter duration
The message in all of this is clear: economic risk is elevated. That means investors are likely to favor cash or near-cash investments, something I highlighted last week.With stocks trading at an estimated 19 times forward earnings, the yield on cash is favorable. And the risk of loss is a lot less than it is with bonds, where some investors have fled from stocks in search of a haven.
Finally, for those out there who are visual learners like myself, a weekly macro chart pack from a large Swiss operation,
… THAT is all for now. Off to the day job…
IF Lake Tahoe area skiing/snowboarding is an economic indicator (HIGHLY dubious!!!), then economic activity has precipitously CRATTERED since Easter!
Sure looks like there's a BIG appetite for >$2000 Gold just sayin'
Thanks as always!