(USTs mixed on above avg volumes o/n) while WE slept; 'when to buy bonds'
Good morning … 2yy continuing to triangulate (CFA level 5.2 terminology),
Momentum appears overSOLD (bottom panel) as Global Wall Street arrives this morning and pregame tailgates for tomorrows FOMC begins … Overnight,
ZH: China PMIs Soar Back Into Expansion, Celebrating End Of Covid Zero
A commentator on BBG earlier noted that a MoM change maybe GOOD but not representative of the LEVEL of activity on a YoY basis and on that basis, the level of activity still not returned TO pre-covid levels, fwiw
… here is a snapshot OF USTs as of 705a:
… HERE is what another shop says be behind the price action overnight…
… WHILE YOU SLEPT
Treasuries are mixed and off earlier highs ahead of today's Q4 ECI data. The overnight data (China recovered quickly in January; some disappointing data in Europe, Australia and Taiwan) is linked in above, DXY is higher (+0.25%) while front WTI futures are lower (-1.1%). Asian stocks were mostly lower, EU and UK share markets are all in the red too (SX5E -0.6%, FTSE 100 -0.95%) while ES futures are showing -0.35% here at 6:45am. Our overnight US rates flows saw a rangebound trade during Asian hours with modest real$ selling in the front end about the only flow of note. Our desk activity was subdued in London's AM hours too with some further 'vol-off' trades seen again today. There was also decent EU real$ buying in intermediate spreads too. Overnight Treasury volume was somehow pretty decent at ~150% of average with 3's (263%) and 30's (182%) seeing some relatively high average turnover this morning.
… We show the daily chart of Treasury 2yrs and it's pretty well-defined bull channel in place since the move high last fall. Take that top line/bull trend out with a close... and that would be our warning (discussed above) that rates could take another leg higher...
… and for some MORE of the news you can use » IGMs Press Picks for today (31 JAN — and STILL SPORTING THAT NEW LOOK!!) to help weed thru the noise (some of which can be found over here at Finviz).
Before moving on TO Global Wall Streets inbox / narrative machine, this one stopped me in my tracks …
Even on $100K, More Americans Living Paycheck to Paycheck
The numbers likely reflect growing strain on household budgets after the cost of living surged, wages often failed to keep up, and pandemic savings got drawn down.
Um, okie dokie …
From some of the news to some VIEWS you might be able to use. Global Wall St SAYS:
A rather large British operation notes,
Global Macro Thoughts: Wait out this risk-on
Amidst a slew of central bank meetings, all eyes will be on how aggressively - and effectively - the Fed pushes back against the recent easing in financial conditions. The 2023 risk rally is not sustainable, in our view. We remain short-term neutral and medium-term negative on risk assets.
Here’s one from a large operation outta Hong Kong — the other side of the very same (negative on risk assets) coin
The big call everyone has been trying to make over the last few months is: when to buy bonds? Of course we don’t have a crystal ball but we are guided by past experience. For example, we think we can look back at 2022 and see the peak for yields was already being established in the final quarter along with a turning point for the US dollar.
Historical data for US bond market returns tells us that the best time to buy bonds is on the penultimate hike. Traders supported by machine learning tools will know what we are referring to. Unencumbered by emotions and biases, without any need for a forecast, the data just gives the facts. At a minimum, it is useful to know this simple rule of thumb: bonds have historically done well after the hike before the last one in a tightening cycle …
… The bullish bond market performance of the last few months presumably indicates that quite a few investors believe the peak for rates is close. After the dreadful performance of last year there might also be a view that things cannot get worse.
We won’t know what the penultimate hike in this cycle is until it has happened….
… Markets are discounting mechanisms that assimilate all available information. Waiting for the definitive data release or signal from central banks risks being too late. Recent moves in the bond markets suggest some investors appear to have learnt this. The penultimate rate hike is likely close, if it hasn’t occurred already. History suggests this is an important moment.
And then there’s THIS (other side of the risk asset coin?) from BLACKROCK
Higher rates reinforce income’s appeal
• We don’t see major central bank rate cuts this year, so we prefer to earn income in short-term bonds, high-grade credit and agency mortgage-backed securities.
• U.S. stocks rose and Treasury yields were mostly steady. U.S. Q4 GDP was resilient but declining consumer spending suggests growth is slowing quickly.
• The Fed and the European Central Bank anchor policy decisions this week. We see them hiking and holding rates higher for longer than markets expect.
… Income is finally back in fixed income thanks to higher yields and coupons. Shortterm government bonds and investment grade (IG) credit now offer some of the highest yields in the last two decades. See the chart
… Our bottom line: Rates staying high and the political tussle over the U.S. debt ceiling are market risks. We take a granular view on fixed income at this juncture. We tactically like short-term government bonds, high-grade credit and agency mortgage backed securities for attractive income…
Goldilocks on what to do **IF** there’s a recession in the US
Hedging for Recession, Positioning for Relief
… If a US recession occurs, we would anticipate significant movements in equities, credit, rates, and currencies. But there are clear ways to hedge against this outcome, by positioning for a decline in equities, a fall in bond yields/bond proxies, and wider credit spreads. Given recent declines in equity and credit volatility, options may offer good leverage to those outcomes. We think positioning for joint asset outcomes in reliably recession-exposed assets is another way to increase leverage as correlations shift.
For those seeking to avoid taking a view on whether a US recession will occur or not, non-US equities generally outperform across scenarios and US Treasuries generally outperform Bunds. This is partly by construction since we are focusing on the prospect of US recession amid some growth upgrades outside the US. But our analysis suggests that the likely spillovers from a potential US recession to other major economies would have to be quite large to undo that. On the upside too, a potential rise in US yields if recession is avoided is likely to weigh more heavily on the more duration-sensitive US equity market. This is one reason why we have argued that US equities still offer poorer asymmetry (real downside in a recession and potentially capped upside in a non-recessionary scenario) unless we see both resilient growth and more inflation and bond relief.
Now at this point, whatever view or expression you are looking to take or however you are thinking to hedge a view … I cannot help but note the very same shop (albeit different desk) offering a different view (from the **IF** recession call)
Global Market Views: Rates Join in as the Industrial Cycle Turns
… 5. Rates likely to join the mix. Further cyclical relief would in many places represent an extension of recent trends, and of our own short-term views: a tactically more positive view on parts of EM, commodities and (particularly non-US) equities and credit. But we think it is now more likely to result in upward pressure on rates. Over the last couple of months, the dynamic of more positive inflation news and the downshift in Fed tightening pace has helped keep a lid on yields even as global growth risks have receded. We expect the inflation and policy environment to remain broadly friendlier, but that dynamic is now well reflected. Inflation swap markets are already reflecting a faster decline in inflation than our (quite benign) view (Exhibit 3) and so provide a small cushion against disappointments. And the US policy curve is now pricing nearly 200bp of rate cuts between mid-2023 and early 2025 (Exhibit 4). That kind of discount will be hard to maintain unless recession risk intensifies, or the labour market falters more clearly. The pricing of longer-dated rates is also more sensitive than usual to recession risks. The longer the US economy can skirt recession, the more the market may be willing to conclude that neutral rates are higher than it is pricing now, particularly if growth actually starts to improve. Because we think upward pressure on yields is more likely to come from receding growth fears than from large upside inflation surprises or significant hawkish policy shocks, at least for now, higher yields need not be a brake on risk assets (as above, a classic growth upgrade in markets would see equities and yields rise together for a period). But the vulnerability to patches of data that push against the inflation relief narrative has risen (our forecasts for Friday’s payrolls and AHE releases are above consensus, for instance, and there is risk of seasonal upside to US January inflation numbers). And we think short positions in both US and European rates are a more appealing part of a macro portfolio now and see higher yields as a more obvious potential headwind to risk asset performance again as growth outcomes improve
AND … today, pre FOMC day, every trading desk manager TO desks across the land,
… THAT is all for now. Off to the day job…