(USTs lower on above avg volumes ahead of the Fed)while WE slept; CPI victory laps; "Signal From Liquidity Is Becoming Loud And Clear"
Good morning … today is as much CPI recap and victory lap as it is FOMC precap day … Yesterday’s LONG BOND auction went as well as could be expected,
ZH: Blowout Demand For 30Y Treasuries At Stop-Through Auction Sends Dealer Award To Record Low
AND here we are …
Triangulating TLINES drawn and fat crayons at the ready for whatever the next move. Momentum (stochastics, bottom panel) suggest that move likely higher (to support up nearer 4%) and again … if you GAVE me the decision or data ahead of time, I’m still not 100% certain i’d place the the correct bet.
Nevertheless, CPI gave to the people whatever they might have wanted and the relief trade in the moments/hours just after — kneejerk bullishly STEEPER and risk ON putting paid to SKIP or pause or whatever it is we’re going to be told to call it, faded at least in rates … but hey,
ZH: CPI Tumbles To 2-Year Lows, But Goods Prices Reaccelerate; Inflation Outpaces Wages For 26th Straight Month
… Gasoline was the biggest driver of the headline CPI's decline...
Hmmm … where did I hear of this concept … Oh, right it was HERE yesterday where the price of EARL leading to lower prices at the pump might very well continue to lead the way FOR the Fed Pause’istas … and thats GREAT. Don’t get me wrong. I’m ALL FOR IT — lower prices at pump — but … the good news IS, an AS EXPECTED CPI led TO the aforementioned BLOWOUT DEMAND for long bonds 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 modestly lower and off of earlier highs ahead of PPI and the FOMC outcome. DXY is lower (-0.2%) while front WTI futures are higher (+1.4%). Asian stocks were mixed (NKY +1.47%), EU and Uk share markets are mostly higher (Italy's FTSE MIB +1.33%0 while ES futures are showing +0.2% here at 6:50am. Our overnight US rates flows saw a quiet overnight session with no thematic flow noted by the desks. Even so, overnight Treasury volume was decent at 125% of average so the guess here is that much of last night's turnover was screen/algo-based or something…… A few of today's attachments illustrate what's discussed above but our first attachment this morning looks at the CPI OER YoY% and Cleveland Fed's NTRR overlay. Cleveland's NTRR (New Tenant Repeat Rent index) appears to have leading (by ~8mo?) properties to YoY OER where, if past is prologue, the peak in OER YoY% may now be in with the trend now finally lower for OER YoY% for the balance of this year and into next.
Next we look at the daily chart of Treasury 2yr yields and how they closed at a new move high yesterday. But similar to the 1y1y rate chart discussed yesterday morning, evidence of evolving bullish divergence remains (drawn in) which leads us to the same conclusion one day later: that there may be plenty of [short] positioning bandwidth in the front-end of the curve for a decent rally if momentum flips bullishly at a close and the divergence is confirmed.
Further out the curve, Treasury 5yr yields kissed support (4.026%) derived by their turn-of-year highs, backing off modestly since. Yesterday's higher high in 5y yields and the so-far lower high in daily momentum (lower panel) reflects the very same conditions emerging in 5yrs as with 2yrs above. Either way, 4.026% is a potentially key support level in 5's to keep in mind today.
… and for some MORE of the news you can use » IGMs Press Picks for today (14 JUNE) to help weed thru the noise (some of which can be found over here at Finviz).
From some of the news to some of THE VIEWS you might be able to use… here’s what Global Wall St is sayin’ …
And now for the victory laps (save for Citi’s call of a hike — unless of course we’re ALL stunned later today),
ZH: "Not Enough For A June Hike": Wall Street Reacts To Today's CPI Report
And in as far as the Global Wall Street reaction goes, well
ABNAmro: US inflation still high, but Fed is likely to hold
BNP US May CPI: Cool enough for a skip, but not for a pause
GS: Core CPI Rises 0.44% on Used Cars and Car Insurance… We view today’s report as supportive of our call for a pause at the June FOMC meeting followed by a hike in July.
JEFF: May CPI +0.1%, Core +0.4%... Some Improvement, but Really It's the Same Old Story
FirstTrust: The Consumer Price Index (CPI) Rose 0.1% in May… However, do not get caught up in the relatively low year-over-year inflation readings for this month and likely next; that has more to do with “base effects,” as outsized monthly jumps in May and June 2022 roll off the year-ago comparisons. However, that surge in inflation last year was followed by a lull, with inflation barely budging in July and August 2022. That means we are very likely to see the twelve-month inflation readings re-accelerate toward the end of the summer.
LPL: Headline Inflation at Lowest Level Since April 2021
UBS: Prices promote a pause
Wells Fargo May CPI: Still Too High, but Better Days Ahead
With that in mind, a bit of a lean forward, a note which calls us all back to a game from our youth…
GS: Red Light, Green Light: Historical Evidence on Hiking Cycle Pauses and Restarts From the G10
■ The BoC and the RBA both recently hiked after pausing their hiking cycles, and we expect the Fed will pause in June before hiking in July. In light of this emerging theme of hiking cycle pauses, in this Global Economics Comment we document four patterns from prior instances when central banks paused their hiking cycles.
■ First, pauses are fairly common historically, although some central banks—including the RBA and BoC—are more likely to pause than others. Second, most pauses are relatively short, with hikes generally resuming after 2-3 meetings. Third, pauses tend to end when unemployment rates decline and inflation accelerates. Although labor market tightening has historically been a somewhat better predictor of restarts, this likely reflects a tame inflation backdrop for most of our sample. Fourth, conditional on a pause and restart, multiple hikes are subsequently delivered in approximately 80% of instances, suggesting that central banks typically don’t restart hiking cycles unless more than one hike is necessary.
■ Given the challenge of fine-tuning policy in a volatile environment and the historical record, we see a clear possibility of further pauses, expect that any pauses will skew shorter this cycle, and would likely see risks as skewed toward multiple hikes where and when restarts occur. Relative to history, however, we expect that any pauses will be more likely driven by upside inflation surprises than tight labor markets.
… The Fed has been notably less willing to pause in the recent past, however, and only previously paused in its 2015-2018 hiking cycle, when the decision to pause interacted with a lengthy advance warning of the upcoming start of its balance sheet run-off.
Pauses Have Been Fairly Common in Recent Cycles, but the Propensity to Pause Varies Across Central Banks
… who knew back in the day, during gym class, we were setting the stage for monetary policy lessons …
Now as we move back to the hear and now AND thinking specifically OF the FED meeting later on,
Bespoke: Beware Powell Fed Days
The FOMC is set to announce its next interest rate policy decision tomorrow at 2 PM ET. After ten straight hikes, futures markets are currently pricing in a 91.9% chance that the Fed will leave rates unchanged for the first time since its January 2022 meeting, according to the CME's FedWatch Tool.
We do a ton of analysis on historical performance around major market-moving events like Fed days. One data point you may or may not have noticed is that US equities have really struggled on Fed days recently. In fact, the S&P has averaged a one-day decline of more than 1% across the last six Fed days, and as shown in the chart below, those declines have primarily come in the final hour of trading following Fed Chair Powell's press conferences.
The rest, is, as they say … behind a paywall and so … I’m moving right along and speaking of paywalls, the mother of all paywalls, a note from Bloomberg via ZH
Signal From Liquidity Is Becoming Loud And Clear
Authored by Simon White, Bloomberg macro strategist,The outlook for risk assets such as stocks and commodities is materially improving as excess liquidity continues to rise.
Quantitative tightening may be ongoing and rates at decade highs, but excess liquidity – the difference between real money growth and economic growth – is rising decisively off its lows. This points to an improving backdrop for equities and other risk assets in the coming months.
The most restrictive rates for decades have been a formidable headwind for markets and the economy. But the nascent rise in excess liquidity points to US rates finally beginning to become less restrictive, turning a headwind for risk assets into a tailwind over the next 3-6 months.
But why should you listen to the message from excess liquidity?
First, it has an excellent empirical record of leading the turns in risk-assets.
Second, the logic is simple: money is created by banks and central banks, and what is not used by the real economy is “excess”, and therefore available to support risk assets.
Thirdly, it is inherently contrarian. It is typically rising rapidly when inflation and growth – which are both heavily lagging – are at their nadir. Thus sentiment is at its weakest precisely when markets unexpectedly rally due to a surfeit of liquidity.
It has utility at market peaks too, when typically sentiment is very bullish but excess liquidity is already falling, leading to weaker asset prices.
Excess liquidity’s contrarianism is on show now.
Despite global rates near decade-highs, excess liquidity has been rising quietly in recent months. Growth and inflation - the latter is expected to show a further fall when the data for May is released later today - are now falling, freeing up liquidity to boost risk assets. As the chart below shows, equities have more upside potential in the coming months from rising excess liquidity.
Commodities should also benefit from an increase in excess liquidity.
This comes at a time when sentiment for commodities is poor after a decline of more than 25% since last year.
How will excess liquidity be affected by the deluge of Treasury issuance now expected? The risks were tilted toward this having a detrimental effect on liquidity conditions overall, but the Treasury’s actions since the debt ceiling are encouraging.
Firstly, so far the Treasury has favored issuing bills over longer-term types of debt. For June, to date they have announced $205 billion of bill auctions versus $92 billion of bond auctions.
Bill issuance should have less impact on excess liquidity as the buyers are more likely to be money market funds (MMFs), who can withdraw liquidity from the RRP facility. If households or corporates are the buyers it would entail a loss of bank deposits and thus reduce M1 (the money input used in my preferred version of excess liquidity).
Over the last four weeks, the rise in MMF assets is similar in size to the fall in the RRP (see chart below), inferring that it is indeed MMFs who have been buying newly issued bills. Higher yields on bills than the RRP is incentivizing MMFs to buy them (that may change, though, if and when the market prices deeper cuts, and term bill rates drop below the spot RRP rate).
The chart above also shows that the Treasury’s account at the Fed (the TGA) has not so far risen aggressively. That is another reason why the Treasury-induced liquidity drain may not be as bad as feared, as a slower build-up in the TGA means liquidity will be siphoned off more gradually.
This will be especially helpful when the Treasury auctions bonds as it is the household sector that has been the largest net buyer in recent quarters. It is also possible MMFs can support bond issuance by funding buyers through lending via SOFR.
Further, we can see in the chart above that reserves have been rising of late. QT may still nominally be in play, but the BTFP and other Fed facilities taken up in the wake of the banking turmoil have introduced a new source of reserves, providing another boost to M1 and hence excess liquidity.
Finally, what about the specter of a recession?
That is a certainly not a zero risk for equities, but perhaps the potential damage is not as high as in previous downturns. Importantly, though, excess liquidity tends to rise through recessions, as central banks are easing (or tightening less) while growth and inflation are falling.
Tighter monetary policy, recession, and fevered speculation in some stocks are all risks currently faced by the market. But the positive signal from liquidity – the ultimate arbiter of asset prices – is getting louder.
Interesting food for thought for us all including those at the FOMCs table … THAT is all for now. Off to the day job…