I’ll draw MY (irrelevant) TLINES and you’ll draw yer very own…
I spy with my little eye a very much overBOUGHT (stochastics) condition which continues to NOT matter in the least. The last time we were ‘overbought’ for this amount of time is, well, AFTER the year-end move LAST YEAR and so perhaps I should stop watching it. But I can’t and won’t.
4.00% 10s now the intersection of MY crayon scribblings and so, ‘support’ in the s/t.
I’m NOT so much in the Team Transitory2.0 camp (and those who are calling for rate cuts with a high degree of certainty in March of 2024). Fool me once (or twice) shame on you but fool me THRICE and shame on ME?
I thought Fed broke something back in March. They did too (and came up with a new funding mechanism to handle bond losses on balance sheets) and NOW they are perceived to be cutting as the economy — at least if you economically workbench the data — which I no longer can — is about to fall down the rabbit hole and NEED the proverbial sticksave.
There WAS some de / disinflation news helping put paid TO global bond market BID yesterday and, well, how quickly we move from a bond market bid celebrating UK ‘flation TO … a bond market STILL bid and MORbid, celebrating an … UGLY 20yr auction … is and has been impressive. ‘Tis the time of year and so …
ZH: Ugly 20Y Auction Sees Biggest Tail Since Oct 2022, Surge In Dealers
(Good thing auctions don’t matter, I suppose OR … simply a reflection OF year - end (lack of)liquidity and staffing, etc … cannot imagine bid / offer spreads on off runs these waning days of 2023 … I can think of at least 4 maybe upto 8 who are cherishing these illiquid moments … Providers of liquidity of last resort … and apparently completely underwhelmed by 20yr auction ‘value’ which was on offer BUT … which didn’t seem to dent bond bull sentiment of the moment!!?)
… and an even uglier equity markets turnabout …
ZH: 'Margin Calls & Massive Put-Buying' - Stocks & Bond Yields Puke As Goldilocks Dies
… A good recap, covering Mike Wilson capitulating, rate CUT BETS exploding higher and all while 20s auction was ugly as can be.
Great.
What to make of it? Not much as best I reckon — i’ve only been out the seat for couple years now but this is how it goes into years end.
You’ve got most of the VIPs working from The Hamptons or South Beach while the B TEAM attempting to guide the algos NOT to lose too much money as they back up the bid / offer spreads … Clients who don’t appreciate this get frustrated at the appearance of lack of effort often times chewin’ out the sales guy (been there done that) meanwhile it’s completely out of his control.
Trading desks are NOT about to incur new risk on the balance sheet if an iota of a chance it will take anything away from the years performance (and so, upcoming bonus) …
Then there’s Citi getting out of every business with spread (first it’s Muni biz now it’s ‘distressed debt’ desk)?
Not exactly sure WHAT to make of it but I’ll say one thing for sure … these last couple weeks of the year are as much the wild west as anything and if you catch the move and are on the right side of the illiquidity, it can be quite fun.
As former independent sellside rates guy, experienced ALL angles of this — the good, the bad and the fugly.
BUT I digress and to the point — i wouldn’t make too much of a narrative out of these last few days of the year…
FT: Bond market rally drives yields past Wall Street’s end-2024 targets
Major banks’ forecasts for next year already hit, as market moves after Fed’s dovish comments take analysts by surprise …
… When banks began sending out their annual forecasts to clients a month ago, they were broadly united in the view that government bonds would rally next year as interest rates start to fall.
But many forecasts have already been met more than a year early, as bigger than expected falls in inflation and a changed outlook from the US Federal Reserve have persuaded investors to bring forward their bets on rate cuts.
Yields on benchmark 10-year US Treasuries have declined by almost a percentage point since the end of October on rising expectations that the Fed will begin cutting rates as soon as March. Yields move inversely to prices.
“It’s been a very quick move in rates, because the Fed has made a very quick pivot,” said Bank of America rates strategist Meghan Swiber. “It just speaks to how volatile the market has been — and how very conditional it is on our understanding of how the Fed will move.” …
… Ten-year Treasury yields slipped to around 3.89 per cent on Wednesday — below the 4 per cent or more that Bank of America, Barclays, Deutsche Bank and Standard Chartered, among others, forecast that they would hit by next December.
The median forecast in a November survey of more than 50 analysts for Bloomberg predicted that 10-year Treasury yields would fall to 4 per cent by the end of 2024…
AND … here is a snapshot OF USTs as of 710a:
… HERE is what this shop says be behind the price action overnight…
… WHILE YOU SLEPT Treasuries are lower, unwinding yesterday afternoon's sudden 'risk-off' spasm amid still deeply 'overbought,' tactical conditions. DXY is lower (-0.28%) while front WTI futures are modestly lower (-0.5%). Asian stocks were mixed, EU and UK share markets are all in the red (SX5E -0.6%) while ES futures are showing +0.45% here at 6:50am. Our overnight US rates flows saw some 'systematic' selling concentrated around the US point though volumes were very weak. Indeed, overnight Treasury volume was just ~45% of average overall…
… Our first attachment this morning shows the daily chart of the Nasdaq (CCMP) and how prices traced out a clear Key Reversal yesterday. A Key [bearish] Reversal is when prices make a new move high before closing the session below the lows of the prior 2+ sessions. It's a classic warning that the prior [bull] trend is out of gas and at threat of reversing- over the near-term at least (since it's a daily chart).
… and for some MORE of the news you can use » The Morning Hark - 21 Dec 2023 and IGMs Press Picks (who CONTINUES to be sportin’ that new, fresh look) in effort to to help weed thru the noise (some of which can be found over here at Finviz).
Moving from some of the news to some of THE VIEWS you might be able to use… here’s SOME of what Global Wall St is sayin’ …
Apollo: New White Paper: 2024 Outlook: What’s Next After the “Fed Pivot”? (shocking to think they view private credit as preferred TO public AND separately note duration risk awareness required)
The “Fed pivot” on December 13 to a dovish stance underscored the rapidly shifting outlook for both growth and inflation. Markets have reacted in kind. But the bottom line is that going into 2024, we still see upside risks to inflation, downside risks to growth, and expect rates to stay higher and for longer than the rest of the market does.
We believe private credit offers an attractive opportunity today given higher yields in general and on senior secured debt in particular—allowing investors to boost income generation in their portfolios with downside protection.
Opportunities in private equity are likely to continue to emerge among potential distressed companies that come along with the combination of slowing growth and high rates. Moreover, we see opportunities in assets that can offer some level of inflation protection, such as infrastructure.
In real assets, particularly real estate, we see more compelling risk-adjusted return opportunities in credit than in equity at this stage of the economic cycle.
Public equities are as unappealing as they have been in 20 years due to stretched valuations. Public bonds—with risk-free yields on 10-year Treasuries hovering around 4.0% as of this writing—appear attractive to investors interested in “locking” higher rates in their fixed-income portfolios. That said, attention to duration risk remains warranted…
… One way to measure whether the stock market is expensive or cheap is to look at the equity risk premium. The equity risk premium measures the return in the stock market minus the return of the risk-free rate, and it tells investors something about equity returns relative to fixed-income returns. In the equity risk premium formula, equity returns are normally calculated by looking at the S&P 500 earnings yield (i.e., the inverse of the P/E ratio). Using forward earnings expectations can be misleading when the consensus sees a meaningful chance of a recession, so in Exhibit 35, we calculate the S&P 500 earnings yield using trailing earnings. With 10-year interest rates trading around 4.0% as of this writing, the stock market today is more unappealing than it has been in 20 years.
Barclays: December consumer confidence shows further optimism (MOAR optimism = MOAR cuts … must be the new math)
The Conference Board's index of consumer confidence rose to 110.7 in December, due to increased optimism about both expectations and the current situation. Confidence has now risen for two consecutive months.
DB: Who is buying Treasuries, mortgages, credit and munis? (may just be the NET supply increasing by 75% in 2024 vs 2023 is WHY there’s been such a dramatic PIVOT? creating a stir — and DEMAND — as you are about to see dramatic INCREASE in what needs to be placed…? askin’ for a friend)
… Foreign ownership of Treasuries continues to fall since peaking in mid-2010’s
… Robust foreign private demand for US Treasuries over last two years
Central banks speed up balance sheet reductions
…10y yield model estimate accounting for central bank purchases is around 3.5%
…Net-net Treasury coupon supply expected to rise by ~75% in 2024 vs 2023
Jeff: Dec Consumer Confidence Index Improves to Highest Since July on Labor Market Optimism (sounds like it’s time to CUT rates, amIright?)
Key Points ■ The headline confidence index from the Conference Board showed an improvement to the highest level since July 2023 at 110.7, and the second highest level in the last 2 years. Confidence bottomed in October, likely on the news of the emergence of the Israel-Hamas war, but it has come roaring back on labor market optimism as well as some additional relief on inflation. ■ Inflation expectations for the next 12 months fell to 5.6%, the lowest level since April 2020 and the first break out of the narrow 5.7%-5.9% range of the prior 6 months. The level remains inconsistent with the Fed's 2% target, but it is an encouraging sign for disinflationary momentum. ■ The labor market differential (Jobs Plentiful - Jobs Hard to Get) improved to +27.5 from +23.0, which was the weakest reading since April 2021.
■ The resilience of the consumer has been well-documented in 2023, especially in the second half. We've been expecting a pullback based on unquestionably low savings and troubling expansion of credit. ■ The decline in inflation expectations warrants the Fed trimming rates next year, but the optimism towards jobs and income suggests that inflation could quickly accelerate again if the landing is "too soft"
MS: Cross-Asset Brief: MSI Turns Negative (NOW you tell us AFTER the markets reversal? thanks. thanks for that :))
Our Market Sentiment Indicator (MSI) has turned negative, exiting the neutral reading it has held since December 12, 2023. This regime has been associated with below-average one-week forward returns for global equities.
Key takeaways
The MSI signal has turned negative, giving a risk-off signal that's usually associated with below-average one-week forward returns for global stocks
A stretched level of MSI and negative changes in seven metrics have caused a reversal in sentiment to the downside, triggering the negative signal
Notably, momentum indicators (eg. ACWI 52-week high minus 52-week lows) and positioning metrics (e.g., S&P 500 CFTC net positioning) have turned less positive
What could change this signal? MSI level can stay stretched for some time, but improvements in sentiment data would cause the signal to go back to neutral
We post daily updates to Bloomberg - MSI level (MSXAMSIL Index) and signal (MSXAMSIS Index). For weekly summaries, please see our Cross-Asset Spotlight
Global Strategy: Despite the recent better than expected inflation numbers, we think the influence of healthy labour markets on wages and domestic inflation will keep G10 central banks on hold for longer than currently priced in. We also see the recent rally in long-dated yields as overdone, given sovereign bonds’ supply-demand dynamics.
US Macro: We expect GDP to decelerate in 2024 (1.3% YoY in 4Q24). Inflation should moderate (2.8% YoY in 4Q24), with the labour market remaining relatively tight (unemployment at 3.9% in 2024). In short, we face an economic scenario of below-trend growth rates, with prices in some cases probably being stickier than expected and the unemployment rate remaining relatively low.
US Rates: Lower long-term rates, a steeper curve and a general tightening of spreads comprise our base-case scenario following the FOMC’s signal of a peak in fed funds at the December FOMC. Falling growth and inflation will act as tailwinds for the dovish markets, taking yields even lower, including the 10y Treasury towards 3%, encouraging us to assume curve-steepeners as well as forward receivers.
… Market direction in 2024 - Fed expectations in driver’s seat The bond market rally seen these past weeks into year-end has been fuelled by a sharp decline in policy rate prospects, where the SOFR forward swap curve now discounts fed funds bottoming at c3.30% in 2025. This is lower than our projections but also means that policy rate expectations will continue exerting downward pressure on long yields if the data match market expectations.
Prospects of higher risk premiums in long rates is an opposing factor, limiting the downside in long Treasury yields, with history demonstrating that a consistent bull trend for bonds is less straightforward until the first cut has arrived.
Falling yields since the November FOMC reduce downside risks but are no reason for the Fed to back-track on its soft message. As Powell has repeatedly said, as recently as December, the Fed is data-dependent and will move carefully.
The trend of soft CPI data eliminated risks of a last 2023 rate hike, while significantly boosting market rate cut expectations. Forwards are currently discounting around 150bp of rate cuts for 2024, most likely beginning in March (c25bp). We maintain our view that the Fed is unlikely to cut rates before mid-2024 and lean towards market pricing of 100bp of easing into year-end, with the first cut coming late in 2Q24.
Market direction will likely take its lead from policy rate pricing the risk premium, which remain two opposite drivers for Treasury yields. A 5% handle on long yields may well be behind us yet into 1Q24 we may see volatile moves within recent range. Going deeper into 2024, rate cut expectations should dominate the widening term premium, resulting in a downward trend in yields and a steeper curve…
State Street: Chart Pack Snack: The Fed’s unfinished business
… Bond Market Opportunities Core bond yields are now more inline with their duration — creating a more balanced breakeven ratio not seen since 2009
…Rates and Inflation As recent economic data showed cooling inflation and slower job growth, the market is pricing in nearly 80% probability of at least 100bps of rate cuts next year
UBS: US Big Data: growth stability amid easing inflation (perfect for rate cut’istas)
Growth momentum remains stable while inflation continues to ease The December Big Data Growth Nowcast signal continues to point to stability (+0.06) in m/m US growth momentum vs. +/-0.75 acceleration/slowdown thresholds (Figures 1, 6). Relative to November reported data, the US Nowcasts expect Manufacturing ISM (49.3 vs. 46.7) to rise towards the breakeven level, while growth in Retail Sales ex. Autos & Gas (+0.6% vs. +0.2%) and Nonfarm Payrolls (175k vs. 199k) slows and Autos & Gas (-1.2% vs. -1.4%) continues to decline. Please see page 2 for detail. The growth momentum metric anticipates combined m/m growth changes across the monthly indicators, accounting for recent data volatility. Historically, momentum stability favours moderate market risk (Figures 7-10). Though not an input to the growth signal, the Nowcasts also anticipate a flat headline CPI (-0.01% vs. +0.1%) and a slower core CPI inflation (+0.16% vs. +0.28%). Note, that our economists' December CPI forecasts are higher: +0.24% headline and +0.31% core.
Risk assets do well in stability but the economy is likely in a late cycle stage
Larger moves are priced on key data release days - US Payrolls and CPI
Wells Fargo: Confidence Surges After Consumers Are Visited by Three Spirits
Summary Consumer confidence rose in December to a five-month high of 110.7. The consensusshattering outturn comes amid falling unemployment and lower gas prices and in particular as the stock market has climbed higher.
…Finally, the stock market is having a bit of a moment. Yale Hirsch, founder of the Stock Trader’s Almanac, coined the term "Santa Claus Rally" in 1972, a timeframe he deemed to include the final five trading days of the year and the first two trading days of the following one.
Wells Fargo: Is This Housing Market Truly Different? Part II (they had me at Granger causality test …)
Summary In Part I of this two-report series, we built dashboards to visualize regional home price trends over the past two decades. Denver and San Francisco emerged as leading markets—a status earned by the fact that their home price indices peaked and troughed ahead of the national index. The dashboard analysis, while straight-forward and easy to understand, is just one way to measure leading and lagging markets.
In this report, we employ a Granger causality test on the same 20 metro areas to determine their relationship with the S&P CoreLogic Case-Shiller National Home Price Index (HPI) since the early 2000s. We also build an econometric framework to gauge how much low interest rates boosted home prices in the past, and we estimate the expected cost of the relatively higher mortgage rates today. Specifically, the framework estimates the effect of mortgage rates on the year-over-year growth in the National HPI. The results suggest that higher mortgage rates are poised to continue to weigh on home price growth in the coming year.
Yardeni: Is Everybody (Too) Happy? (attempting to ‘splain YEST — say something without saying much at all — and not impacting his longer-term process of thought)
Everybody in the stock market (at least everybody with long positions, which includes most investors) has been happy since the S&P 500 bottomed on October 27—until it stumbled a bit today. The market was up in the morning despite a dive by FedEx shares. But stock prices tumbled during a late afternoon selloff. Most pundits concluded that the market was overbought and due for a correction. We agree, which is why we haven't raised our long-standing year-end target of 4600.
Was there a fundamental trigger for the selloff? The only one we can point to is mounting evidence that the Gaza war is turning into a more regional one. We remain concerned about that possibility. On Tuesday, US Secretary of Defense Lloyd Austin, on a visit this week to Bahrain, home of the US Navy's headquarters in the Middle East, said Bahrain, Britain, Canada, France, Italy, the Netherlands, Norway, Seychelles, and Spain were among nations involved in the Red Sea security operation to protect ships transiting the Red Sea that have come under attack by drones and ballistic missiles fired from Houthi-controlled areas of Yemen. The Houthis are backed by Iran.
That's a good excuse for some profit-taking, which makes sense to us given the rising risks in the Middle East. In any event, bullishness has gotten a bit excessive of late. Consider the following …
… (3) So why isn't the price of crude shooting up as a result of the mounting tensions in the Middle East? One reason is that the global economy is weak because of recessions in China and Europe. Another is that US crude oil field production rose to a new record high of 13.3mbd during the December 15 week (chart).
Additionally, lots of Americans are working from home or commuting less often to work than before the pandemic. So gasoline consumption is down (chart).
… And from Global Wall Street inbox TO the WWW,
Bloomberg: Fed and Markets Resume Their Unhealthy Co-Dependency (El Erian OpED)
Monetary policy is once again swamping factors like economic growth and geopolitics for traders, threatening financial stability.
… The near exclusive focus on monetary policy was supposed to fade as we attained “peak rates” and retreated only modestly from there over time, accompanied by an auto-pilot shrinkage of bloated central bank balance sheets via quantitative tightening. Central banks’ deterministic influence on asset prices was to give way to other factors, particularly the outlook for economic growth, the smoothness of the last mile of the inflation fight, and the availability of funds to readily absorb the step-up in debt issuance due to large deficits and higher borrowing costs.
This is not what is happening. Rather than slowly moving to the wings, the Fed in particular reinforced its lead role last week by spurring massive price moves in virtually every asset class. Chair Jerome Powell’s words about the potential for interest rate cuts have reverberated around the world, influencing expectations of what other systemically important central banks will do.
This plot twist has been far from smooth. Less than 48 hours after Powell’s remarks following the last Fed meeting, policymakers were back on stage trying to walk back what markets happily labeled the “Powell Christmas Pivot.” When they had little impact, more Fed officials joined in, taking a different tack that involved explaining what Powell really meant to say. The confusion was such that a week after Powell’s comments, the specialized media was still debating what the Fed’s genuine policy signal had been…
FRB New York: Outlook-at-Risk: Real GDP Growth, Unemployment, and Inflation
Estimates as of December 2023 for Average Real GDP Growth over the Next Four Quarters
Downside risks to real GDP growth remain at historically normal levels with the estimated conditional distribution of average growth over the next four quarters almost indistinguishable from the unconditional distribution.
Nordea: EUR rates: 2024 – ECB cuts are priced too fast, not necessarily too far
Outright risks are two-way and significant with risks skewed towards receiving outright for 2024. Steepeners and asset swap spread tighteners could be the trades of the year… again.
ZH: US Consumer Confidence Rose In November, But 'Family Financial Conditions' Worsened
… The labor market indicators are trending worse - now at the weakest since April 2021...
Source: Bloomberg
When asked to assess their current family financial conditions (a measure not included in calculating the Present Situation Index), the proportion reporting “good” ticked down while those saying “bad” rose slightly.
… AND with 2023 coming to a close a couple attempts to lighten the mood …
Investing.com: Year-End Rally Continues As Fed Signals Mission Complete On Rate Hikes!
What a great article !!!!
SO MUCH INFORMATION !!!
Amazing work !!!