(USTs lower on light volumes)while WE slept; "In normal markets..."; CHINA; decision point dead ahead (TLT)
Good morning …
China's exports tumble in May as global economy slows, adding to recovery woes - SCMP China's exports fell by 7.5 per cent in May compared with a year earlier, while imports fell by 4.5 per cent last month, year on year. Beijing has pledged to shore up trade to support the overall economic recovery, but China's exports have struggled due to weak global demand.
This is today’s first link from IGMs Press Picks (just below) and I can’t imagine how bad the data / situation is truly IF they are willing to allow this print. Perhaps there’s a chance we’ll soon be importing disinflation and an even worse economic situation and so, a trade back down TO triangulating ‘resistance’ ‘bout 3.55% or below?
… 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 this morning with Treasuries under-performing both Gilts and Bunds as Treasury ramps the TGA back up. DXY is lower (-0.16%) while front WTI futures are higher (+1.1%). Asian stocks were mixed (Nikkei -1.82% though), EU and UK share markets are mixed while ES futures are little changed here at 6:50am. Our overnight US rates flows were limited during Asian hours with 'small' buying in intermediates noted. In London's AM hours as WN block buy was noted along with better real$ buying in the belly and front-end. In swaps, better paying at least partly offset the cash market buying with interest to steepen 2s10s and 5s30s curves noted from real and fast$. Overnight Treasury volume was ~75% of average overall.… Our last attachment this morning looks at TLT's, the 20+ year Treasury ETF. Picked this one to show the rangebound conditions discussed above and the mild bullish skew in short-term momentum that can be seen in the lower panel. Many duration/curve benchmarks look like this one right now where there's evidence of a slight, tactical bullish skew- amid broader ranges that are, in many cases, quite well-defined.
… and for some MORE of the news you can use » IGMs Press Picks for today (7 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’ …
This morning I’m going to lead with an email which caught me off guard and which gave me a chuckle.
Whenever I see an email / note begin with,
In normal markets…
Perhaps it’s just ME but …. doesn’t that simply depend on one’s perspective and career? While I will await anxiously YOUR definition of NORMAL MARKETS, a few words from a large German bank,
Remains of the steepening trade
In normal markets, away from the zero bound, monetary policy shocks arrive from the front end of the curve and, as their effect attenuates along the term structure, the curve either bear flattens of bull steepens, depending on whether the Fed tightens or eases. These dynamics are captured in the Figure which shows the history of the 2s/10s slope across different monetary policy cycles (Fed funds are shown on inverted axis to align with negative directionality of the slope). Orange circles represent the current values and dashed lines projections. We highlighted the periods of monetary easing in order to estimate the magnitude of steepening across those periods. In 2007-2008, we consider only the pre-Lehman cuts as a way of excluding the effects of forced unwinds at the peak of the crisis.
… it appears that the inversion of the curve and high levels of volatility, driven by two different factors (one-sided conviction regarding the expectations of the short rate path vs. high uncertainty about the macro and policy response), have created paralysis in trading that inhibits RV which indirectly erodes liquidity.
Ok so … from ‘normal markets’ TO what is going on in China,
GS: Lower trade surplus on weaker-than-expected exports in May
Bottom line: Export value declined sharply in May in both year-over-year and sequential terms, significantly below the consensus forecast. In contrast, import growth was basically flat month-on-month, beating expectations of a modest decline. Export value declined sharply across major trading partners and products on weaker external demand. The import value of commodities (such as soybean and crude oil) rose sharply in sequential terms primarily on increasing volumes. Weaker-than-expected exports led to a lower trade surplus in May (US$65.8bn vs. US$90.2bn in April).
AND
Barclays on China: Slumping exports reinforce our rate cut call
China's May exports missed expectations by a wide margin, with shipment to the US and Asean seeing double-digit declines. With mounting downward pressure on growth, we think more urgent policy support is needed to arrest the slowdown. We think policy rates could be cut as early as next week.
May: -7.5 y/y for exports, and -4.5% y/y for imports (both in USD terms)
Bloomberg consensus (vs Barclays): -1.3% y/y (-2.0%) for exports, and -8.1% y/y (-8.0%) for imports
April: 8.5 y/y for exports, and -7.9% y/y for imports (both in USD terms)
Finally, this one
China’s May trade data had a fairly large drop in exports, attributed to weakness in exports to the US and Japan. This does not necessarily signal a sharp decline in global demand. Global demand patterns now favor services rather than goods (China is not a service exporter). Moreover, there was surprising strength in China’s first quarter export numbers, helping to boost the GDP numbers. Potentially the strength reported in the first quarter was at the expense of reported export data later on.
US April trade data offers some insights from the other side of the equation. The US is still a fairly important manufacturer, so its export data might offer some insight into trade flows. Ultimately, however, the US is the world’s key consumer, so it is the import numbers that will attract market attention…
Leaving aside HOPE for China-led VBOUND and demand inspired global economic boom, lets head back TO USs shores where there IS / will be a boom. Just one of a different sort …
First up some of the facts and what we think we know,
Jefferies: Treasury Bill Supply for This Week: Big Increases in 4- & 8-Wk Bills as TGA Refill Continues
BILLS: Treasury just announced $60 bln 4-week bills and $50 bln 8-week bills for auction at 11:30AM Thursday. The size of the 4-week is $25 bln bigger than last week and the 8-week is $15 bln bigger.
Treasury also announced a $46 bln 4-month bill auction for tomorrow at 11:30AM. The size of that auction is $2 bln bigger than last week.
As far as we are aware, no CMBs were announced, but there could be one announced on Thursday.
When the auctions settle on June 13, they will raise $35 bln in new cash.
Large and growing issuance … I’m certain there’s no problem …
LPL: Glut of Treasury Issuance Coming. What Could Investors Expect?
… Regarding the impact on T-bill prices, historically, T-bills, which have maturities of up to one year, have been easier for the market to digest. In fact, there’s been very little correlation between supply and prices. So, while issuance will be supersized this time around, we don’t expect meaningful disruption in the T-bill market.
The impact on market liquidity, however, could be a bigger risk. There are three primary domestic buyers of T-bills: banks, nonbanks (mostly households), and money market funds. Of those three primary buyers, nonbanks and money market funds can most directly impact market liquidity. So, with the amount of T-bill issuance coming to market, the impact on market liquidity will depend on who the primary buyers will be. However, as seen on the chart below, there are two avenues in which liquidity will be impacted: bank reserves and assets held at the Federal Reserve’s (Fed) overnight reverse repo facility (ON RRP).
Bank reserves represent the minimum amount of deposits a bank must have on hand. And when bank reserves fall below a certain threshold, bank lending is impaired. Nonbank investors generally fund purchases through the bank reserves channel. The Fed’s ON RRP facility allows certain money market funds to borrow from or lend to the Fed, using government securities as collateral, and agreeing to buy or sell back those securities at rates set by the Fed, on an overnight basis. This channel has very little impact on market liquidity…
… Bottom line is that as long as U.S. Treasury securities are regarded as risk free securities, there is always going to be demand for T-bills. The questions though are at what price and who will those buyers be? In our view, there is currently an abundance of liquidity in the market that can be used to absorb the glut of issuance coming to market in the next few quarters without a disruption to prices or liquidity.
Oh, ok so … no problems, then, right? Back TO this mornings IGMs Press Picks
Treasury's $1 Trillion Debt Deluge Threatens Market Calm – WSJ U.S. government could face borrowing at rates near 6%, up from 0.1% less than two years ago
… In recent months, markets have been relatively placid. The S&P 500 has gained 12% this year, buttressed by a resilient labor market, the AI-led tech stock rally, and signs that the Federal Reserve is entering the final stages of its interest-rate campaign. The Cboe Volatility Index, known as Wall Street’s fear gauge because it measures the price of options that investors often use to protect against stock declines, is now hovering at multiyear lows.
… The best-case scenario, according to strategists, is if money-market funds step up as the primary financiers of this round of bond issuance. Such funds, which invest much of their more than $5 trillion in short-term safe assets, could absorb a sizable chunk of the supply by yanking the $2.1 trillion they have parked at the Fed’s overnight reverse repurchase facility, known as a reverse repo. That would likely limit any blow to broader markets.
Overnight reverse repurchase transactions at Federal Reserve
…According to Deutsche Bank analysts, bill yields could widen 0.10 to 0.15 point above SOFR this time around but are unlikely to go higher. Potentially complicating the comparison, analysts say, is this issuance comes at a time when markets lack the central bank’s support.
Given the Fed offers 5.05% at its reverse repo rate facility—which would increase if it upped the fed-funds target range—the U.S. government could be stuck borrowing more than $1 trillion at rates approaching 6%. A year-and-a-half ago, the U.S. could borrow in the same market for 0.1%, Treasury Department data show….
Oh, ok so … maybe NOT so easy?
Moving along TO a couple things from the Ivory Tower … first up an updated economic and SECULAR outlook … from The BeachBoys
PIMCO Secular Outlook: The Aftershock Economy
Markets will likely face more volatility as the global economy exits a period of massive fiscal and monetary support. In this post-policy era, attractive yields on high quality bonds encourage a more resilient approach to investing.
KEY TAKEAWAYS
…With the era of volatility-suppressing policies possibly over, markets are likely in for a period of heightened volatility, with an unusually large array of potential aftershocks. We believe the risks to global growth are skewed to the downside over our fiveyear secular horizon, and that returns across asset classes are likely to be more differentiated in this new era.
We expect central banks to maintain their existing inflation targets and to prioritize keeping longer-term inflation expectations anchored at those target levels. We believe that neutral long-run real policy rates in advanced economies will remain anchored in a range of 0% to 1%. With rising government debt and the possible return of an inflation risk premium, we expect the yield curve to steepen as investors demand more compensation on longer-term bonds over the secular horizon.
Our expectations of low neutral rates and a return to near-target inflation reinforce a positive outlook for core and high quality fixed income. After rising sharply last year, starting yield levels – historically strongly correlated with future returns – for high quality bonds are close to longer-term averages for equity returns, potentially with significantly less volatility and more downside protection than equities. This may help investors to construct prudent, resilient portfolios without relinquishing upside potential. We have a bias toward high quality, more liquid investments and remain cautious about more economically sensitive areas. We expect increasingly attractive opportunities across private markets over time, particularly in light of the changing banking landscape..
High quality as in USTs?
… Our secular views also build upon our latest Cyclical Outlook, “Fractured Markets, Strong Bonds,” which anticipated modest recessions across developed markets, with tighter credit conditions raising downside risks. We said major central banks are near the end of their rate-hiking cycles, although not yet close to normalizing or easing policy, while future fiscal responses may be constrained due to high debt levels and the role of post-pandemic stimulus in fueling inflation …
… Investment implications: It pays to be resilient
… FIXED INCOME
Based on today’s starting yield levels – which historically have a strong correlation with future returns – high quality bonds may offer long-term, equity-like return potential with significantly less volatility and more downside protection than equities. We believe fixed income markets are pricing in expected volatility in ways that equity markets are not. Further, our expectation that central banks will maintain their credibility when it comes to price stability supports our view of bonds as a hedge against equity risk in a diversified portfolio.
With U.S. government debt rising above 100% of GDP, and with the possible return of an inflation risk premium, the term premium on U.S. Treasury bonds will likely increase and may be a secular force that steepens the yield curve (see Figure 3). That curve is inverted today, but we expect investors to eventually demand more yield for intermediate and longer-term bonds given higher inflation uncertainty. That would further increase the allure of bonds.
an economic chartbook for those of us who are VISUAL LEARNERS,
DB: The only prescription is more Powell-bell
This monthly chartbook highlights our top charts for understanding the current state of the US economy and the outlook for 2023 and 2024. The document features several sections including discussions of: assessing the extent of a credit crunch; why a modest end 2023 recession remains our baseline; whether the labor market is normalizing or weakening; how inflation is showing progress but remains piping hot; and why the Fed is likely to raise rates in July after skipping June.
… Bank deposits have been declining steadily for a year as deposit rates have lagged Fed rate hikes
… And banks’ willingness to lend to consumers looks recessionary
… Underlying inflation measures remain very elevated
… DB Fed projections: Terminal at 5.3% and cuts beginning in early 2024
AND there are more economic charts but for now, I’ll angle to leave on a more optimistic one …
KIMBLE: Treasury Bonds ETF (TLT) Trading At Key Decision Point!
… As you can see, TLT has been in a narrowing pennant pattern for the past 9-months, frustrating both bulls and bears.
The MACD momentum indicator could be creating a bullish crossover at (2), from the most oversold levels in the past 17-years. Similar crossovers are marked at each point (1) and have produced big rallies.
Should TLT breakout at (3), it would send its first bullish message in a LONG time…
I read that chart as a more bullish one based on HIS MACD — momentum indicator — but that could be just ME reading it wrong (as if it were stochastics, which it clearly isn’t.
… THAT is all for now. Off to the day job…