(USTs MIXED on avg volumes)while WE slept; remain calm. all is well; reFUNding; FOMC and a couple / few charts ...
Good morning … ok SO lemme get this straight. Fed jacks rates, reiterates NOT in rate cuts camp and so … stocks down bonds (got 5s)BID? A(s updated) visual with a note of (shorter-term) caution,
Momentum warning signal — stochastics (bottom panel, arrow) on verge of BEARISH cross? Buyers of dips hoping to see stocks pop and bonds drop? For somewhat MORE and a longer term and more BULLISH context (ie MONTHLY), please continue to scroll….
PacWEST wasn’t an issue ‘til AFTER the market closed (or was it)? More on KRE (via Hedgopia) just below… but for now … 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 mixed and off their earlier lows as banking worries persist (see top link and here: WSJ). DXY is modestly lower (-0.10%) while front WTI futures are little changed. Asian stocks were mixed/higher (Japan in Golden Week), EU and UK share markets are lower (SX5E -0.85%) while ES futures are showing -0.33% here at 7:15am. Our overnight US rates flows saw a very slow London AM session with the bulk of our flows in the front-end around X-date cusips. In the long-end, very little flow but some mention of attention turning back to steepeners (for good reason, we say. See attachments). Overnight Treasury volume was ~average overall which is pretty solid with Japan closed.… Treasury 5yr yields, monthly: The long-term momentum set-up looks exactly as it did for 5's back around January 2019 too...
… and for some MORE of the news you can use » IGMs Press Picks for today (4 MAY) 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’ …
ADP at 9mo HIGH, you say?
ZH: ADP Payrolls Unexpectedly Surge To 9 Month HIgh Amid "Clear Slowdown In Pay Growth"
Never FEAR, a weakening (NEGATIVE) NFP to appear and soon?
BNPs US employment preview: Leading indicators suggest negative payrolls print coming soon
We project payroll growth to weaken further in April, commensurate with slowing economic activity. An outright decline is likely on the horizon, but our analysis shows a drop may not materialize until the US economy enters a downturn. Our call remains for a recession in H2 2023.
We estimate nonfarm payrolls at 160k versus 236k prior, which would be a third consecutive step down in the pace. Weaker consumer and business spending mean possible layoffs in retail, transportation and manufacturing; banking developments could weigh on financial sector employment.
The breadth of job gains across industries is narrowing, a negative sign. Service sector jobs are set to comprise a larger share of increases in coming months, with growth likely concentrated in areas still catching up to pre-pandemic levels. In fact, the categories still rebounding from the pandemic are making up an increasing share of total employment gains – almost half (~45%) of jobs growth as of late. Just a year ago, the share was one-fifth of the total.
The unemployment rate could tick up to 3.6% versus 3.5% prior, if labor force participation rises again, as we project. The recent pickup in insured unemployment suggests that January’s 3.4% unemployment rate was the trough for the cycle.
Average hourly earnings growth may hold steady at 4.2% y/y. The measure has sent a more encouraging signal about decelerating wage pressures than some alternatives.
Treasury STUNS market and to buy BACK bonds, you say??
ZH: Treasury Keeps Quarterly Debt Sales Unchanged Ahead Of Second Half Surge, Stuns Market With Launch Of Treasury Buybacks
… But much more importantly, the Treasury announced that, after months of consideration, it’s kicking off a buyback program in the calendar year 2024. By buying back older securities and issuing more of the current benchmarks, one aim is to help bolster patchy liquidity in the Treasuries market. The program could also help the department to smooth out volatility in its issuance of Treasury bills as it manages its cash balance. We previewed this last October in "The Market Is About To Be Shocked With A "Treasury Buyback" Operation Twist." Seven months later it's now a fact.
"Based on feedback from a broad variety of market participants, including the Treasury Borrowing Advisory Committee and primary dealers, Treasury believes it would be beneficial to conduct regular buyback operations for cash management and liquidity support purposes" the Treasury said in the refunding statement.
“Treasury anticipates designing a buyback program that will be conducted in a regular and predictable manner, initially sized conservatively,” the statement said. The program is “not intended to meaningfully change the overall maturity profile of marketable debt outstanding,” it added, but of course, what the market will read here is that the Treasury just launched its own version of QE, at least until the Fed joins the fun after the next market crash.
More from Global Wall St below
I’ll begin by NOT leading with any FOMC recap or victory lap BUT with a large German bank’s writeup of buybacks comin’,
Treasury announces debt buybacks starting in 2024
The Treasury refunding announcement surprised many with the decision to implement a buyback program in 2024. Although the issue had been under study by the Treasury for some time, an announcement was not expected this soon, especially since many key elements have yet to be ironed out. Nonetheless, the Treasury wants to make this process as transparent to the public as possible, and it says it will continue to work on specific design issues and provide updates on a quarterly basis.
Here are some thoughts on the buyback program:
Treasury buybacks are not the same as Fed QE, although they might share some characteristics and achieve similar market outcomes, such as enhancing Treasury market liquidity especially for off-the-runs.
The program is intended to be maturity-neutral, meaning it should not meaningfully change the maturity structure and WAM profile of outstanding Treasury debt.
Operations will likely split into two categories: liquidity support for longer maturities (greater than one year), and cash management for maturities up to two years.
For liquidity support, operations should help reduce cheapness in off-the-run securities, but they aren’t meant to address acute market stress.
For cash management, the goal is to reduce episodic large cash balances without resorting to deep bill supply cuts.
The initial sizes of $5-10bn per month for liquidity support is slightly smaller than what we had recommended ($10-15bn), but the total across both buyback types of up to $20bn per month should be sufficient to make a meaningful impact on the market.
Our best guess is that buybacks would start in February 2024 with details announced at the refunding event.
A high-level summary from the Treasury can be found here.
For another view of the reFUNding,
NWM: Treasury left its auction sizes unchanged at this refunding announcement, but mentioned that increases in auction sizes later this year are possible (possibly as early as the August refunding) – below we discuss our expectations for what those would look like. Buybacks are a go and look like will be implemented in 2024 – the final decisions on the details aren’t made yet, but we discuss the potential format on the back of Treasury’s current views. Finally, we look at the discussion topics addressed by TBAC – staggering auctions and increasing TIPS auction sizes.
… We don’t doubt that buybacks will have a positive impact on local liquidity, but we think the jury is still out on whether it would be a structural boost to market depth. Additionally, the Fed will presumably be in easing mode at that point which should be beneficial for market liquidity. We attribute some of the deterioration in liquidity to the Fed’s hiking cycle and the reversal of it should have the opposite impact (Chart 6).
Taking a turn away FROM the reFUNding and looking at some of the data which the Fed is considering — JOLTS update yesterday was one aspect of the labor market with tidbits of insight — and some further tidbits ON said data point from a large German institution,
Not quit(e) extraordinary anymore
In yesterday's press conference, Chair Powell referred to the labour market as being "extraordinarily tight", citing amongst others job openings. However, the labour market is no longer that "extraordinarily tight" if one focuses on the private sector quit rate, which is now back in its pre-covid range.
The quit rate is one of the most reliable indicators of labour market slack as: (1) it does not get revised much (unlike NFP), (2) it abstracts from having to debate the participation rate and Nairu (unlike the unemployment rate), (3) it does not lag around turning points (unlike job openings) and (4) it correlates well with real wages and core services ex-housing inflation.
An easing of the labour market is the last missing piece of the puzzle required to open the door for a genuine Fed pivot. It is falling into place.
“I QUIT!” … maybe just NOT in capital letters going forward? For somewhat more on WHY this QUITS rate worth watching and for a different (workbenched) angle,
… Powell's concern is that the labor market remains too strong as evidenced by March's JOLTS report showing 1.6 job openings for every unemployed worker and April's ADP private payrolls report showing a gain of 296,000. As a result, the ECI measure of wage inflation remains too high according to Powell, though the quits rate suggests it will moderate over the next nine months (chart).
3mo AVG, 9m lead / lag … whatever your view, QUITS continue to be top of mind at least as far as the most astute on Global Wall Street are concerned…
In as far as the FOMC is concerned,
ABNAmro: Fed stays hawkish but moves to data dependent mode
BBG (Authers VIEW): Powell's narrative revives talk of a pivot
BMO: FOMC: 25 bp and Done
BBG (I mean BNP): Powell tees up pause, turns down cuts
DB: May FOMC recap: They've lost that hikin' feelin'
FirstTRUST: Has the Fed Paused? … The Fed remains all mixed up. The reason it’s mixed up is because in the 2008-09 crisis it abandoned its long tradition of implementing monetary policy through scarce reserves and imposed a new policy based on abundant reserves. They didn’t know where it was heading at the time; now we’re finding out. The turmoil in the markets isn’t over. We remain cautious on equities and think a recession is on the way.
GS: FOMC Hikes by 25bp; Hints At June Pause While Maintaining Hawkish Bias
GS: May FOMC Recap: A Pause Is the Baseline
MS: FOMC Reaction: Conditional Pause Delivered … The Fed has not pre-judged the direction of its next move, but "won't cut rates" this year if inflation is in line with its outlook. Our strategists maintain 2s30s, long 5y UST, long 10y breakevens vs. long 2y UST, and long USD.
Yardeni: Powell's Plateau
WFC: FOMC Raises Rates by 25 bps But Signals "Hawkish Pause"
AND … given PacWEST situation developing, well, BANKS and woes via BBG (via ZH)
ZH: Banking Woes Increase Pressure On Fed As Hike Looms
By Garfield Reynolds, Bloomberg Markets Live reporter and strategistThe US banking system is still struggling with the impact of the
Federal Reserve’s 4.75 percentage points of interest-rate hikes, even as the central bank is set to add another quarter point today.
The resolution of First Republic Bank’s woes was supposed to relieve matters, but regional lenders promptly sank on concerns others will need rescuing. This looks to be a slow-moving car crash — monetary policy famously acts with a lag. It is also a bit counter-intuitive, because traditionally the expectation is that higher rates improve bank profits by allowing them to increase the gap between their cost of capital and the interest they charge.
This time round, things are a bit different. There’s the persistent yield curve inversion that works against those who borrow short-term and lend longer-term, and the Fed’s helped make money-market rates high enough to lure depositors away. Then there’s the unintended consequences of post-2008 regulations that mandated lenders to hold larger amounts of Treasuries, assets that are now worth a lot less after Fed rate increases.
All that underscores the potential that the banking woes, and their own slow-moving impacts on broader credit conditions, will push policymakers to halt hikes sooner than they have been signaling.
That was written / offered BEFORE FOMC and so,
Fed Hikes 25bps As Expected, Signals 'Hawkish Pause'; Warns Of 'Tighter Credit Standards'
… What happens next?
Finally (I mean it) a couple links for those of us visual learners.
Hedgopia: Fed Pauses; Markets Demand 3 Cuts By Year-End, Inflation-Focused Powell Pushes Back
… The ongoing regional banking crisis is the newest variable in this equation.
It has been nearly two months since Silicon Valley Bank experienced a deposit run and was seized by the regulators. Over the weekend, First Republic was acquired by JP Morgan (JPM). The market is looking for the next domino to fall.
Turns out PacWest Bancorp (PACW) is weighing strategic options, including a potential sale. Pre-open, Western Alliance Bancorporation (WAL), too, is under decent pressure, among others.
KRE (SPDR S&P Regional Banking ETF) acts like it is anticipating problems ahead. It reached an all-time high of $76.30 in January last year, with a lower high of $67.37 last August and $64.77 this February. Come March, it began to fall apart, slicing through the neckline of a head-and-shoulders pattern (Chart 3).
AND a weekly MACRO chartpack brought to us all by the Swiss family Robinson
…The weakness in Commodities is seeing US Breakeven Inflation Expectations swing lower within their range, and we still expect an eventual break below major support at 208bps to confirm a renewed trending phase lower…
… which in turn should move US 10yr Bond Yields out of their tight recent range to open up a move to our core 3.00% objective. US 2yr Bond Yields maintain a major top and are also on course for a fall to 3.00% in our view, suggesting further bull steepening is likely.
AND as we await ALL of the dust to settle and narratives machines (AI?) to continue churning out chapter and verse, well, I cannot help myself but offer some thanks to JPOW and Co who CLEARY has some blame in all which continues to be going on under the surface,
Said another way (Jamie Dimon voice, please), REMAIN CALM, ALL IS WELL
AND as it IS May the 4th, allow me to say … May the Fourth Be With You,
… THAT is all for now. Off to the day job…